Price doesn’t keep moving in any direction with ease, there will be times when price faces some difficulty.
Breakouts happen when the price overcomes this difficulty. Traders can trade a couple of strategies to capitalize on these breakouts.
What should you trade?
Now, what strategies should you use to make the most out of these breakouts? Well, it isn’t any strategy as such but it’s rather some patterns that you have to look out for.
There are lots of patterns that are seen to be formed in the markets. These are also known as price action patterns.
You have patterns like triangles, wedges, flags, pennants, and others. But you need to focus on a couple of things only and I’ll tell you which ones.
Look for high probability setups like trendlines, channels, and support and resistance formations.
This is a textbook example of a trendline and looks how price stops respecting it and it breaks out from it.
Now, trendlines can be both ascending i.e. bullish, and also descending i.e. bearish.
But it’s just the trendline that is bullish or bearish, when price breaks out of it, its trend reverses. I’ll get back to more on this later.
This is a nice price channel, an ascending channel in fact.
Trendlines and channels can be considered to be the same as the price respects some lines.
There’s a breakout when the price stops respecting the line, either ascending or descending, and it breaches it and moves past it.
Lastly, we have support and resistance.
As you can see here, the support area was pushing the price up as and when it was approaching it, but eventually, the price broke past it and we have a decent breakout.
Now I’ll show you how exactly you can trade these strategies, where to enter, where to place the stop loss and targets.
How to trade breakouts?
Now that you know the type of patterns or setups that you need to look for, I’ll now show you how exactly should you approach it and trade it.
1. Trendline breakouts
We’ll first start with trendlines. See this declining trendline.
Look at how the price breaks out of the trendline and went from being in a downtrend to being in an uptrend now.
But the question here is, how exactly to trade this?
The first thing that you need to look for here is a candlestick that breaks the trendline and closes out of it.
In this case, we need to look for a candlestick that closed above the trendline.
We have a candlestick closing above the trendline and do we take the trade here? Not yet. We now have to wait for a retest and then we take the trade.
The price went up, retested by coming down a little, and then again went up.
This is a valid breakout trade for us and we take the trade with confidence.
Stop loss to be placed below the recent low and targets should be a minimum of a 1:2 RRR.
2. Channel breakouts
We’ll trade channel breakouts just like we’d trade trendline breakouts.
We need to look for a candlestick to close out of the channel, we then have to wait for the price to retest.
We have everything that we need, so what does this call for? It’s time to take the trade here.
Decent trade here right, but did you notice one thing? Look at where the stop loss is placed. It’s placed just below the channel that was formed.
We need to place the stop loss at a place that keeps us in the trade even if the price is not moving like how we wanted it to. That’s why you need to protect your stop loss.
With the target, you can decide that according to what works for you but I’d suggest having an RRR of at least 1:2.
3. Support and resistance breakouts
Support and resistance breakouts are also very straight forward like trading trendline and channel breakouts.
We first need to plot support or resistance zone and then look for a candlestick to close outside of it.
We have a decent resistance zone and a candlestick closed outside it too. The next thing we need to see is a retest.
It’s time to take the trade here.
Good trade again. Look where I placed the stop loss at. It’s just below the low ad it is well protected.
When will you start trading these strategies?
These are good breakout trading strategies and you should really consider using them.
First practice these strategies in a virtual environment, get adept to the strategies, and then only trade them in the live markets.
Do let me know how it works out for you.
Also, don’t forget to share this blog post with others and let them also capitalize on breakouts.
Feel free to reach out to me with any questions and I’ll get back to it for sure.