7 Things to Consider When Adopting a Positional Trading Strategy
When you’re just entering the trading world, the abundance ofinformation might seem overwhelming. The truth is, once you find a suitable strategy, you will be able to focus on what matters and improve your trading performance. Read more below about one of the most lucrative strategies amongst both novice and professional traders and see if it might work for you too!
Trading on breakouts – A Top Strategy
A breakout represents any price movement outside a defined support or resistance level. If you want to use breakouts as the main focus of your strategy, then you need to open an entry position when the market price breaks away, or moves out of a trading range.
Here are the main seven things you need to consider when adopting a positional trading strategy:
1. Pick the right financial instrument
Whether you’ll go for a stock, a currency pair, or any other asset – make sure it is compatible with this strategy.
2. Study the price charts
Study and identify price movement patterns that can help you. The support and resistance area is essential, because it isn’t exactly a straight line, as traders make different decisions at different prices in this area. Try to let the patterns tell you when the right time to enter a position is.
3. Set goals
Trading on breakouts can be tricky and backfire when you least expect them to do so. To minimize risks, it is for the best to set the following objectives and stick to them: when to enter, when to exit, and when to put the stop loss order.
4. Find a good entry point
The last thing you need is to fall for a false breakout. Mostly, depending on which way the market breaks, your entry needs to come on a retest of former support or resistance.
5. Set a stop loss
A stop loss or/and a take profit order are ideal anytime if you’re not sure when to exist the trade in the heat of the moment.
6. Exit the trade as settled
We go back to the third step, stick to your objectives no matter what! If you don’t use a stop loss, then remain in the trade until the price reaches its objective or you reach your time target.
7. Be patient
In some cases, breakouts give returns overnight or maybe in days. Moreover, in theory, this strategy doesn’t sound very difficult – but in practice, emotions might stay in your way, especially at the beginning. Just be patient, the experiences you gather will teach you the most valuable things you need to know.
The advantages and disadvantages of trading with a positional strategy
Trading on breakouts can be incredibly profitable and traders with all levels of experience can use it effectively if they learn how to do it. The proof is the Turtle Trading experiment of the renowned traders William Eckhardt and Dennis Richards, which emerged from their argument whether successful traders were born or made. Eckhardt, who claimed great traders were born with their abilities, lost the bet as the novice traders ended up making $100 million. The subjects were given simple rules to follow and strategies that included the use of breakouts.
With clear objectives, the breakout trading strategies are not only lucrative, but also safe. The trend is your friend, the stop loss order is your back-up and the overall losses can’t be that bad if you stick to your plan. The increased volatility and momentum that come with the breakout most of the time can generate substantial profits. Although, of great importance is the broker you choose, as you need a performant trading environment and professional support. TradeFW.com is one of the online brokers that stand out in the industry due to their impeccable services. With the famous MetaTrader4 platform it offers and the experienced support (available 24/5), TradeFW is definitely one of the companies that can increase your chances of successfully applying any breakout trading strategy.
On the other hand, the positional strategies come with some disadvantages, as well. Firstly, stay away from the fake breakouts! The main reason for false breakouts is taking signals against the main trend. Also, with great volatility, the profit ratio increases, but so does the risk one. Start off with simple methods, clear objectives and focus on them to avoid such situations.
Conclusion
There is a large number of trading strategies that use breakouts, but most of them function based on the principles discussed in this article. These types of positional strategies have been used for decades and are still popular due to their limited risk and potential of bringing substantial gains. If you set and follow objectives, act on trends and pick a professional broker; you will significantly increase the odds in your favor!