Which breakout trading strategies are used by trading specialists?
You might know breakout trading to be a type of trading strategy that the traders implement when there is a trend upcoming or a directional move on the price of assets. During such occurrence, the price of the concerned asset will shift above the resistance area or below the support area; when the price starts trending in the direction of breakout. Whenever a strong breakout is predicted, and a trend in pricing takes place, the traders become busy in the marketplace. Traders prefer to enter the market through the breakout scenario instead of entering while using exhaustion levels and the levels of retracement.
Being a breakout trader, the first of your concern should be minimizing your losses and at the same time, maximizing your profit, as you can. Breakout trading has the risks of its own, to be a successful trader, you’ll have to apply strategies because a lot of people participate in trading, but not everyone wins. Upon noticing the title, you must have already understood what I’m going to talk about this article. After you finish reading this, I hope you’ll have more than average knowledge about the concept of breakout trading, what triggers the situation and how and by using what strategies professional traders turn this to their advantage.
When, for some time being, the price settles below the resistance level or above the support level, trade breakouts occur. Experts can interpret the intensity of the breakout and predict the next moves accordingly. When breakouts show signs of great conviction and takes place in higher volume, the trader will assume that to be an indicator of the price to be moved into that direction. However, the resistance and support levels vary depending on the traders. So the breakout is subjective from trader to trader too.
Popular strategies that experts use while a trading breakout
- While trading breakout, keep an eye out for the resistance levels and stock’s support since they are a vital indicator of the outcome of the breakout. The more the stock price touches the areas of resistance and support levels, the more validity they gain, and thus becomes more important. And if they are in play for a longer time, that inevitably brings back better results. So, find a suitable candidate before you start trade for a breakout.
- Another strategy is to observe the chart and look for a “V” shaped swing. Those create the resistance level. You’ll need to have knowledge of price levels and how to identify them, once you do, patiently wait for the candles to breakout above the resistance levels to assure that the situation is going as anticipated. For further confirmation, look at the VWMA indicator if you see it stretch up, and at the same time, the moving average is deeply inclined to the upside – you should buy at the price the breakout candle closes with the VWMA moving upward.
Now that you are already done buying, the next step is the prevention of loss and securing profits. At first, you have to set up a stop-loss service, of course – place it below the candle that initiates breakout. Let me tell you how it helps you to avoid loss, suppose the price breaks below the breakout candle, and you buy at that price; it will lead to failure. But that means false breakout, and you shouldn’t trade then, thus, avoiding loss.
However, this whole process is vastly dependent on luck and traders’ intuition. When the price breaks below the VWMA indicator, it means the current rally is more likely to discontinue since there are no more buyers to sustain it. To make a profit, you’ll have to make an early booking in the trade market.
- Plan your trades ahead of time; it saves while you have to make an instant decision by keeping you ready and also lets you avoid pre-anticipated risks. In the process of doing so, after finding a good and suitable asset to trade with, first, you’ll have to consider your entry point. Entry point is no less critical in the breakout trading. An investor will initiate a bullish position when the price rises close to the resistance level, and the same way they will establish a bearish view. Even though the key of trading breakout lies in the swiftness of action on your part, but you have to refrain from acting too quick – that can make you fall in the trap of false breakout. As you already know, in the false breakout, the price does go close to the resistance or support level, but later comes back to its previous level anyway. To avoid such misfortune, you can look for volumes that are above average, like many investors do.
In the same way, you’ll also have to be thorough with the exit plan. Observe the stock’s trading pattern to lock a target price to trade on. You can calculate the sum average of the price swings to get an idea of the price to target. When you reach your profit goal, you can exit the trade, or if you still wish to continue, you activate the stop loss service to keep your profits intact. If you fall into the prey of false breakout and loose deposits, then to activate stop-loss service, you should use the previous resistance and support levels as a line, so you don’t lose anymore.
As you may have already understood, breakout trading is a game of speed, so you need to absorb the situation and also the consequences of it in a short time before you apply any strategy. So, if your plan works, you get to enjoy the benefits immediately, and if it doesn’t – no worries, you can work on moving on from this loss and learning from that, plan more efficiently for next trade breakout. Keep eyes on the market and news, any story that might work as a catalyst for a breakout, preparing beforehand enhances your chance to gain more.