The breakout trading strategy

iStock_000020528318XSmallThe idea of the breakout trading strategy is to keep the trader on the front position when the market begins to reverse. Usually, breakouts are monitored closely as they show a key turning point in the manner prices change in the market. Several traders find this trading strategy catchy because it doesn’t rely upon the time period of the trade. Please note it is considered as one of the best trading strategies by many professional traders.

What is a breakout in trading ?

A breakout refers to a situation where the cost of an underlying asset starts to break its support levels or resistance with ever larger volume. Once the cost of an asset begins to decrease below the support level, a trader can enter SHORT market position to take benefit of this breakout.

On the other hand, if the cost of the asset begins to move beyond the resistance level, a trader can enter a LONG market position. As already said, breakouts refer to a major change in the way costs are going to move due to the increase in volatility.

Isolating the expected breakout points

Usually, traders isolate probable breakout points, they trust highly on support and resistance levels. This is because costs hover around these regions with always increasing frequencies. The time period of these occurrences also play a role, as they suggest the possibility of a breakout. Chart patterns like Triangles and Flags are also great indication of possible breakouts.

Entry Points

In order to identify an entry point during the breakout, you need to check if costs are closing below the support level or above the resistance level. If the closing costs are close to resistance level, then you should take a bullish stance. But, if closing prices are close to the support level, you should be holding a bearish market position.

Pay attention if you can encounter “Fakeouts”. Fakeouts are when you enter a trade expecting for the market to move in one direction but end up with the market going in the another direction. This can be avoided by reconfirming the trading signals by looking for above average trading volume and stability in costs.

Exit Points

A trader can use historical data to check what a reasonable profit target is, to help identify possible exit points. On the other hand, you can use the average of price fluctuations as the base level of your profit target. Lastly, if your trade is not going the way you expected, then you can use the previous resistance level as the new support level and vice versa. As prices are decreasing, this is a great way to assist you find the perfect cut-off point. Also, at this point, it is important that you get out of the market fast and hold the losses.

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