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A Look at Breakouts and How to Trade Them

Posted on Monday, February 17th, 2020 by Sean Sechler

A Look at Breakouts and How to Trade Them

Trading success is all about working hard to find the right setups and executing at the right time. There’s nothing worse than spending time and energy watching a stock for a while and then stepping away for a few minutes only to find out later that you missed a big breakout. On the other hand, one of the more frustrating things that can happen in trading is getting faked out with a false breakout.

Without a doubt, the ability to recognize potential breakouts and trade them successfully is a skill that can pay off in a big way. Breakouts can happen in all types of market environments and at any time of the day. By using technical analysis and proper risk management, some of your biggest wins can come from executing well on a breakout trade. If you are interested in learning a little bit more about breakouts and how to trade them, this article is for you. Let’s take a more in-depth look at them below.

What is a Breakout?

It’s quite easy to identify a breakout on a chart when you are looking back on historic price action. On the other hand, finding breakout potential in real-time can be extremely difficult. A breakout occurs when the price of a security is moving above or below key levels in price action. If a security rises above a key resistance area, it could indicate a breakout towards the upside. When a security’s price falls below a key support area, it might signify a breakout to the downside. It’s important to understand that just because the price of an asset goes above or below support or resistance, it doesn’t necessarily mean that the breakout will happen.

How to Identify Breakouts and Trade Them

If you are interested in trading breakouts, the first thing you need to do is familiarize yourself with price action and technical analysis. The more time that you spend mapping out key levels and learning about chart patterns, the better your abilities to trade breakouts will be. Failed breakouts occur all of the time, which is why you need to practice trading them and learn what to watch for in order to achieve profitability.

  1. Become an Expert at Mapping Out Key Price Levels

If you want to be able to catch a breakout, you need to become experienced with mapping out key levels of support and resistance. Look for securities that have touched a key support or resistance level multiple times to confirm the price level’s strength. The more times that the price touches those areas and respects the level, the more confident you can be that it is an important price in the market. This aspect of technical analysis is a bit of art and a bit of science, so make sure you are practicing on a regular basis.

  1. Watch for False Breakouts

A lot of times, traders get easily faked out after they map their key support and resistance levels on a chart. False breakouts are always a possibility, which is why you need to be careful when trading this strategy. One of the best ways to avoid false breakouts is to keep an eye on volume. Generally speaking, if the price of a security moves above or below a key price level with heavy volume, you can be more confident that a breakout is occurring. False breakouts usually occur when the price of a security breaks a key support or resistance level with weak volume, signifying that the breakout is not as strong.

  1. Be Patient

Successfully trading breakouts is all about patience. A lot of traders end up with losses when they first start trading breakouts because of a lack of patience. For example, as soon as the price makes a move above resistance or below support, beginners are likely to enter the trade on the hopes of the breakout following through. This is not the right approach, as it’s extremely important to wait for confirmation and allow the candle to close above or below key levels before you jump into a trade. Also, keep in mind that the timeframe you are using is always a crucial component for trading breakouts. If you are day trading, keep an eye on a 5-minute or 15-minute daily chart for confirmation before moving onto the 1-minute chart for entry. This strategy can help you avoid getting faked out and can help you be more patient as you wait for confirmation.

Trading breakouts can be a very profitable strategy if you master it. Just keep in mind that it takes practice, patience, and resilience to master.

 


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