Breakout trading can be extremely profitable and can appear to be quite easy. But is it? Or is it more complicated than it first appears? Yes and yes. It does appear to be easy, but in fact, it is not. The first skill that it requires is the ability to judge if a specific support / resistant will stand or fall. That in itself requires some trading experience. The whole reasoning behind breakout trading is to understand what might cause support and resistance to fail. Here are some of our favorite tips for using trading breakouts.
What Are the Market Breaks to Watch For?
If you witness a resistance level failing, then your goal is to put in a buy order while the market breaks out at a higher point. If the support level fails, the point is to put in your sell order while the market is breaking out below it. Basically, you are predicting which way the momentum is going. What you are looking for is a market that is stuck in between support and resistance points. With great patience and an eagle eye, watch for the market to go beyond its support or resistance. You can expect a period of volatility after such a break – that is where you want to enter. Yes, this requires great patience, but the rewards can be worthwhile.
How Do Breakouts Differ From Other Trades?
Most forex trading consists of reacting to the existing market. You watch the charts, check your own rules and make the decision to enter or not. With trading breakouts, it’s different because you are waiting for momentum to step in. That’s why it is also called momentum trading. Experienced traders are able to profit through the increase in the market’s volatility. However, it can be a bit confusing when in this type of trade, you buy high but sell low. Really, it takes guts but can be extremely rewarding.
Tips for Recognizing Breakout Trades
When you’re ready to step into trading breakouts, you have a few options. First is waiting until the volume has gone up to confirm the breakout. This typically means a surge in volume, which follows a time of trading low volumes. You can also use volatility cycles to your advantage. This involves discerning trading ranges while in a low volatility period and then going into a breakout trade while the volatility is high. Of course, you can also trade breakouts going in the trend’s direction. In this case, it’s best to enter breakouts that are following the current trend. To find the direction, take two swing points. Use them to draw your support or resistance line that is going against the trend.
Keep in mind that following a breakout, there is a period of increased market volatility. Whichever breakout you choose (and there are several options) be sure to have a well-defined plan for an exit that you can quickly take advantage of if needed. So enter the breakout trade at the point you choose, but always be ready for a quick escape!