Trading Strategy

How to Take Advantage of The Breakout Trading Strategy

September 7, 2022 | 11:36 am | The 5%ers' Blog > Trading Strategy
September 7, 2022 | 11:36 am
The 5%ers' Blog > Trading Strategy
How to Take Advantage of The Breakout Trading Strategy

Breakout Trading Strategy

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!


What is the Breakout Trading Strategy? 

For easy comprehension of what Breakout Strategy means, it is important for you to understand what Breakout means.

What is a Breakout?

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.

What is a breakout


Above is a pictorial example of what a breakout means.

Therefore, Price Action Breakout Strategy is designed to help traders enter trades as soon as the price breaks out of the range.

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.


So, What is a Support Level?

A support level is a zone (and not a line) where the price experiences huge buying pressure due to a previous decline in price.

Support Level

A support zone is referred to as a ‘Demand Zone.’

What is a Resistance Level?

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.’

Resistance Level

Either way, there is a huge difference between the supply and demand zone.

Ok then, let’s move on to the next section:


Types of Breakout Strategies & how to Use Them

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:

Continuation Breakout Strategy

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 –

  • Identify an already existing trend.Existing trend
  • Ensure that a tight consolidation is formed at the end of the impulsive trendtight consolidation
  • Wait for the price to form a continuation candlestick pattern at the break of the tight consolidation. In this case, three white soldiers.Three white soldiers
  • You can then place your trade as advised, but either way, it depends on you.
  • Set your stop loss below the support of the tight consolidation when taking a long position or above the resistance of the tight consolidation when considering taking a short position.Set a stop loss


Reversal Breakout Strategy

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.

How to identify a reversal breakout strategy:

There are three crucial things to put in mind when you’re trying to recognize a reversal breakout:

  1. The price must be at a very strong support or resistance level (especially on higher timeframes, like Monthly, Weekly, or sometimes Daily).reversal breakout strategy - support level
  1. The price must have been in a range for quite a while.Reversal breakout strategy - Range
  1. There must be a candlestick pattern that indicates breakout in the opposite direction e.g. The engulfing candles or The three white soldiers. In this case, The three white soldiers.

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 –

  • Identify the end of an already existing trend using the three points mentioned above.Reversal breakout strategy - Range
  • Wait for a breakout from the consolidation or range. For example, the three white soldiers.Three white soldiers breakout
  • Place your stop-loss below the support or above the resistance. The take profit can be placed strategically as you please.stop-loss

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.


False Breakouts

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.

False Breakouts

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:

How To Trade False Breakouts

  • Identify strong bullish/bearish candles at resistance/support levels, taking out previous highs and lows.How To Trade False Breakouts
  • Wait for a strong full-body reversal.Wait for a strong full-body reversal
  • Then place your short or long entry at the opening of the next candle.Entry at the open of the next candle

I hope you’ve enjoyed this price action breakout strategies tutorial.

Frequently Asked Questions

Does Breakout Trading Work?

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.

What is the Best Timeframe For Trade Breakout? 

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.


Breakout Trading Strategy Conclusion

In this article, you have learned

  • What Breakout Strategy is
  • Types Of Breakout Strategy:
    • Continuation Breakout Strategy and
    • Reversal Breakout Strategy
  • False breakouts or FAKEOUTS


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