Breakout Trading: How to Trade Breakout like Pro!

Are you a trader? Do you trade breakouts? If yes, then only you can understand how exciting breakout trading can be😂.

Breakout trading feels like, the price quickly moves in your favor and it seems like you’re printing money. However, it can be equally painful if not traded properly as most of the breakouts usually fail. You might have traded breakouts earlier noticing the price breaking above Resistance. The stock is forming a big breakout candle with the good volume and supper bullish, and thus you go along with it. First, the trade goes in profit and you are happy but suddenly, the price does a 180-degree reversal. Finally, you find yourself praying “please god let my buying price come I will exit immediately.“

“It is observed that more than 70% of the breakouts fails. Thus, the breakout trading need a systematic approach to avoid false breakouts.”

In this article of StockTrone, we are going to share our strategy to trade the breakouts successfully which will increase your breakout trade accuracy up to 80%. Further, we are also going to share some tips and tricks that are going to filter the failed breakouts.

What is a Breakout?

Breakout means when the stock moves to a certain important level very quickly with big momentum. A breakout usually happens with the start of a new trend and gives the opportunity to catch the entire move.

Technical analysts and business news channels frequently use the very fascinating word “Breakout” on a day-to-day basis. Breakout strategies are employed to enter the early stage of a trend that is possibly going to start. Yes. It can be exciting to trade breakouts. The price is moving fast, the candles are bullish, and the momentum is in your favor. However, when it feels “right” to buy a breakout, it’s usually the worst thing you can do. However, there is a huge profit probability in a breakout trade in a short span of time, there is inherent risk involved in trapping into a failed breakout. There is always a fear of getting caught in a false breakout.

Boarding a running train is psychologically difficult so is true with the breakout trades.

Chronological Sequence of a failed Breakout Trade

1. Stock forms a bullish candle at a breakout level
2. In the short term, the buying pressure is exhausted and can’t push the price higher.
3. Big players start to take a profit.
4. At the same time, bearish trades are going to short the market.
5. Market reverses.
6. Now, those who bought the highs are bleeding.
7. They no longer hold the pain and they cut their losses.

So, from past experience, we have learned that we cannot trade every breakout and we need to learn how to avoid these false breakouts.

3 Pro-tips to filter the Failed Breakout Trading

Breakout Trading Strategy #1: Buildup before the Breakout

To trade a breakout, there must be an important level that the market is going to cross. In case of a bullish move, a stock will breach a resistance and for the bearish breakdown, it will be going to give support.

To trade a breakout, we need a buildup near support/resistance.

So what do I mean by buildup? The buildup is basically a tight range near an important support or resistance level. For example, as shown in the chart below, the price reached the resistance level and started holding the resistance. Logically, resistance is an area from where the selling pressure may likely come, but instead of reversing from the resistance, the price started holding the level.

So what does it means? Clearly, new buyers are entering the market and they can only profit from this trade if the price moves higher. Sounds logical?

At the same time, those who are selling at resistance will place their stop loss above the resistance. Plus, momentum traders will hop on board and buy the breakout. All these factors increase the buying pressure and the market is likely to breakout higher.

Breakout Trading Strategy #2: Buildup before the Breakout Price cannot breach an important level in a single stroke

Remember that the price can never cross an important level without respecting it.

So what do we mean by this? It is observed that if the pricing hits the same level multiple times, it increases the probability of breakout. We look for a breakout candidate when it is hitting the same level 3^rd or 4^th time in a short span of time.

Breakout Trading Strategy #3: Buildup before the Breakout Higher Lows at resistance/Lower High at support

Now, similar to the buildup, whenever we see a higher low at resistance, it increases the probability of breakout. Whenever the price approaches an important resistance, those who bought at the lower level will look to book their profit. At the same time, the short-sellers are waiting to short the stock. It may increase the selling pressure dramatically resulting in a sharp price decline.

Just think about it, every time when new buyers are entering the market while making a higher low, the swing length decreases. And in the last, swing buyers do not get any profit. So the only way to make a profit is when the stocks will move higher.

Also, there is a strong buying pressure supporting the higher prices, the buy stop orders are clustered above resistance, which clearly shows a sign of strength. Here’s what it looks like:

Just by following the price action, we can now see a chart pattern now, you might be familiar with this. Yes, it is an Ascending Triangle. So if you spot such a pattern, it means the market could breakout higher. In case of a down move, this is the inverse of what we’ve learned earlier. Whenever you see lower highs into Support, it tells you that there’s no buying pressure and it’s called a Descending Triangle.

How to Trade Breakout like a Pro?

• Whenever I see an area of support/resistance, I look to trade its breakout.
• The first and foremost criterion is that it must be the third attempt of breaking that level.
• Two failed attempts and now buyers are trying again. It increases the probability of breakout.
• When the market is attempting a certain level, I always look for a buildup near the Resistance/Support. Obviously, it will increase the probability of breakout and reduce my risk.
• For a final confirmation, I always look at volume and candles formation in consolidation.
• For a bullish breakout trade, the buildup will show big green candles with big volume followed by red candles with small volume.

Conclusion

So after reading this article of StockTrone, you might have understood that you cannot approach for a breakout trade every time the price hitting a support/resistance. Rather, develop a systematic plan for trading breakouts based on the buildup, the number of attempts price is hitting the key area, higher lows at a support and lower highs at a resistance.

Let us know what you think about Breakout Trading and what are your strategies of Breakout Trading. Subscribe to our trading page on Instagram for daily insights about trading moves.