When the market is ranging, every trader would expect an impulsive trend just after the range, and I’m sure you would want to get into the trend as soon as it begins, right?
The Breakout Strategy has been strategically designed to satisfy traders’ needs and help them hop into the trending market as early as possible.
In this article, you will learn Breakout Strategies that have been tested so far and how to leverage them for your trading.
Let’s dive right in!
For easy comprehension of what Breakout Strategy means, it is important for you to understand what Breakout means.
Breakouts are strong trade signals that precede impulsive movements in the market.
It occurs when the price impulsively breaks out of an already existing range. Hence, its name is BREAKOUT.
Above is a pictorial example of what a breakout means.
Since it is automatic that after a range, there is always an impulsive move, traders have been able to device this strategy that will help them get into trades immediately once the trend begins.
The reason stated above makes the Breakout Strategy’s popularity not far-fetched.
The usual approach to the market with this strategy is closely monitoring the charts to enter the trade as soon as it begins or setting entry orders and stop losses which are commonly below the support or above the resistance.
It is necessary to have a brief understanding of what SUPPORT and RESISTANCE mean.
A support level is a zone (and not a line) where the price experiences huge buying pressure due to a previous decline in price.
A support zone is referred to as a ‘Demand Zone.’
A resistance level is a zone where the price experiences huge selling pressure due to the upward impulsive move in previous price action.
A resistance zone is called a ‘Supply Zone.’
Either way, there is a huge difference between the supply and demand zone.
Ok then, let’s move on to the next section:
Generally, a price action breakout strategy can be used either to join an already existing trend or a trend that is coming to an end and is about to reverse completely.
Here’s what I mean:
As its name implies, the continuation breakout strategy helps traders hop into an already existing trend.
For you as a trader, this means using a continuation breakout.
First, identify the market structure of the charts with an already existing trend followed by a brief consolidation.
Below are the step by steps approaches you should apply when you want to trade continuation breakouts –
The Reversal Breakout Strategy is used by traders when a trend that has already come to an end consolidates for a while and is about to break out of that consolidation in the opposite direction.
There are three crucial things to put in mind when you’re trying to recognize a reversal breakout:
Keeping these three points in mind, identifying a reversal breakout should not be difficult to spot.
Below is the step-by-step approach to follow when trading reversal breakout –
If the above rules are followed, using these breakout strategies would increase your chance of a more successful trade.
However, not all breakouts are bound to happen. After all, the market is simply using the historical price to predict future price movements with some tools, as that is one of the most realistic ways to learn to trade financial markets then you notice price breaks below the support or resistance line, which gives you breakout signals Only for it to break and then rally way up to its initial position.
So when this breakout technique happens, it is called FALSE BREAKOUTS or FAKEOUTS.
A false breakout is a reversal price action, which can also be termed “market manipulation,” in which the price breaks below or above the zone and then quickly & impulsively reverses. It occurs in resistance or support zones.
Unfortunately, many amateur traders are the usual victims of this ‘bait.’
When the price breaks through a support or resistance zone, amateur traders would think it is a golden opportunity to place a trade.
“Oh, this bearish candle definitely means a continuation.”
Others may say, “Opportunities come but once, let me jump in.”
Only for them to place their stop losses and see themselves taken out immediately.
Once these stops are triggered, you can agree that the price would most likely continue to reverse due to the fuel generated from their stops. So how can you leverage this for your advantage? and that leads to the following sections:
I hope you’ve enjoyed this price action breakout strategies tutorial.
Trading breakout is a very profitable trading strategy, but many fall victim to FAKEOUTS. Though when your risk management is in place, one losing trade should not be a problem.
Since whatever happens on the higher timeframe also happens on the lower timeframe, the same technique can be applied to extract some cool cash from the market.
In this article, you have learned
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