Profitable Breakout Strategy

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Breakout strategy

What is Breakout?

Breakout is the movement of the trade price of security outside the support and resistance level with high trade volume. Traders of breakout enter the market position once the price of the security breaks. If the security price moves above the resistance level, then the trader takes a long market position and enters a short market position when the price breaks below the support level. 

The investors of the market use a breakout trading strategy to capitalise their profits based on the future trend and price fluctuations. Traders have several options in the market to execute their trade; however, breakout trading aids entry in the market by predicting the move. 

The traders of breakout strategy become active players once they trade in the strong trend of the market. Traders can use the breakout to enter and exit the marketplace using the support and resistance levels. 

How to identify a Breakout?

To identify a breakout situation, traders have to use technical and fundamental analysis or both to have a confident analysis of the trade and the financial market. Traders can go countless ways for recognising the breakout trading opportunities of the market. Below discussed are some significant signals to identify breakout in the trades: 

Support and Resistance: 

Support and resistance levels are the key aspects for trading in the financial markets. Traders can use these to have entry and exit defined in advance. Using the levels, traders can test the prices of the market before they return to control. When the price extends the past levels of the price, then a breakout is ensured. Support and resistance is a technical analysis tool that is viewed from both the perspectives of price changes and market fundamentals. 

Chart Patterns:

It is a popular tool of the market to identify the breakouts; candlesticks are a good example for getting the forecasts of trends. Traders can study these charts simply and predict the market trends to identify breakouts in advance. 

News releases and updates: 

The economic reports, data and daily news are necessary for having an insight of the market pricing. The uncertainties of the market are due to the technical and fundamental changes, and if a trader has both these, they can easily identify the breakout in advance.

Market Consolidation:

Market consolidation is a scenario of indecision that helps traders in the market. When the security trades in a range and the trend is sideways and varies depending on the market fluctuations. When the range is broken, it makes big market fluctuations, but traders should be aware that if the range is intact, it cannot be predicted. 

Timeframe of the market also plays a vital role in the breakout identification as different strategies have different timeframes. 

Profitable Breakout Strategy

Traders who want to use the profitable breakout strategy have to follow the below-mentioned steps. These would help traders identify the breakout and earn profitable returns from the same. Let’s check these out:

Step1: Price Range and V swing

The first thing to identify in breakout strategy is the price range; once the price level is known, breakout trading is easier to carry out. Next, traders have to identify the resistance level through the charts and patterns, which will help study the market fluctuations. It will reject the resistance level, which leaves behind a V shape swing that trades high. 

Step2: Break and close above the resistance level

So, the second step after the identification of resistance is waiting for the breaking point. When traders use the candlestick charts to study the resistance, they will find breakout candles closing above the resistance level. It signs that the bulls are in control. Patience is the key to success in breakout so, traders have to clearly monitor the market trends to identify the resistance level and break out the situation in the trend. 

Step3: Volume Weighted Moving Average(VWMA) and the buy at breakout indicator

The third step is to get a confirmation from the VWMA indicator when the volume-weighted moving average stretches upwards with a deeper inclination. This happens after the breakout in the market; the VWMA moves gradually high when the breakout takes place, that is, after breakout occurrence. When the VWMA moves aggressively higher, it shows the high volume trade due to breakout. 

Step4: Placing stop-loss and Taking profit

Traders, at last, can place their stop-loss order below the breakout candle due to the break below the candle initiating the breakout, which is a false breakout sign. Therefore, traders do not buy here and back out of the market trade position. 

To take profit, the break below the VWMA indicates less buyers in the market, so; traders should go for getting the profits at the earliest before the market rolls over. 

Breakouts are quick to profit-making techniques, and traders need to be fast in identifying them and taking action to be advantageous. However, they should be careful of false breakout alarms. 

Pros and Cons of Breakout Strategy

Pros and cons are the quick insight into the breakout strategy so, here we have the points: 

Pros:

  • Limited risk: Breakout strategy has limited risks as the traders can use the support and resistance level to identify the entry and exit points of the market. Thus, minimising the risks of the market. 
  • Optimised profits: Traders can have high profits using the breakouts as they can be identified in advance, and actions could be taken per the trading instrument. 
  • Trade management: As with breakouts, traders can identify the entry and exit; thus, they have trade management and successful gains from the trade.

Cons:

  • False breakouts: Traders have to be alert as there may be indications of false breakouts, which could lead to loss. 
  • Actions: Traders have to be quick with their decisions as breakouts are not for long, and if a trader fails to identify them, they can incur a loss. 

Conclusion

Breakout trading is a potential and significant strategy of the financial markets, which gives traders an insight of the market. Traders can identify the market situations and plan their entry and exit, which in turn leads to calculated trade decisions and increased profits. 

However, traders have to be alert of the false breakout situations that form in the market. 

For using the breakout trading strategies, traders can take the help of brokers such as ABinvesting. They have all the required tools to help traders identify the breakout and take steps accordingly. 

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