This post is written by trader and trading coach Jet Toyco.
Every time I read or watch a market analysis report…
You will always hear something like:
“This stock is about to breakout!”
“Expect a breakout here on this currency pair!”
“This cryptocoin has broken out, wait!”
Sounds familiar.
Well, of course…
Reading these breakout calls can inspire you to trade or give you the confidence to trade.
But here’s what you’re missing:
These phones will tell you when to buy, but they won’t tell you when to sell.
yes…
- When do I need to enter a deal breakout?
- How should trades be managed?
- When should I receive my profit?
If you don’t know the answers to some of these questions, don’t worry.
Because this guide will teach you everything you need to know about trading breakouts so you know not only when to enter them, but when to exit them.
Sounds good?
So let’s get started…
Trading Breakout: What It Is and How It Works
Simply put…
Breakout is like opening a pack of Pringles!
These delicious chips are sealed and locked up for months waiting for you to open them and eat:
Breakout is like being first in line when the building opens.
You are the first to explore this entire area:
And it’s the same with trading!
A trade breakout is catching the price when it is waiting to “open” out of the range and eat up the profit potential.
And trading breakouts are the first to “enter” the move, as the market can make a new swing.
Makes sense?
In other words, breakouts occur when a particular market transitions to new market conditions!
now…
I know this showed only one type of trading breakout:
A rebound within the trend is followed by a breakout.
but…
Did you know there are many other types of breakouts?
There are also types of breakouts that can be “predicted” before they occur.
If you want to know what they are, read on…
The “Secret” of Trading Breakout
Trading breakouts can come in many forms, including:
- trend continuation breakout
- trendline breakout
- volatility breakout
let’s share them with you…
(You’re a boy for a treat!)
trend continuation breakout
As we’ve already seen in the previous section, this is easy!
fundamentally…
We need to make sure that there is a valid trend going on.
How do you know if it’s a valid trend?
Simple.
With a 200-period moving average, you can:
If the price is above the 200-period moving average, it makes sense to look for an upward breakout.
The opposite is true when the price is below the 200-period moving average.
by the way…
You can use 190MA, 150MA or 112MA.
Importantly, we are using long moving average periods to identify trends!
So if you want to learn more concepts about moving averages check out this guide: The Moving Average Indicator Trading Strategy Guide
cool?
Let’s move on…
trendline breakout
Now here’s the interesting part.
When it comes to trading breakouts on trendlines…
We are looking for a trend reversal here.
That is correct.
Trend reversal, not trend continuation!
Let me show you how…
Step 1: Draw a trend line with two valid touches
Step 2: Wait for the price to make a strong close below the trend line
PS I’ll tell you when I get into these types of breakouts later, so stay tuned.
At this point, you’re probably thinking:
“Wait, this is how to use trendlines!”
“Trendlines are for capturing trends!”
And you are right!
Trend lines are often used to dive into existing trends.
but…
You would be surprised at how common trend line breakout reversals are on charts.
volatility breakout
Now, just in case you don’t know what volatility is, it simply falls into two categories.
- Low volatility market (price movement is still there)
- High volatility market (strong price movements)
Let me show you what I mean…
Currently, it is often not possible to accurately determine whether a chart price is in a high or low volatility market.
So what is the solution?
Of course, use the Average True Range indicator.
Simply put, the ATR indicator is like an “X-ray” vision when it comes to understanding volatility.
PS We used the 20-period mean true range in the ‘SMA’ calculation
So how do we find out here when it comes to trading breakouts?
do not worry.
I’ll tell you and it’s this:
The longer the market range, the harder the breakout.
Repeat after me…
The longer the range, the less likely it will occur.
This is important.
Better remember it!
So the next time you see the ATR indicator quieter than usual…
Be prepared to look for entry opportunities in case the price breaks out of highs or lows.
By the way, if you want to know more about the ATR indicator, you can find it here: The Complete Guide to the ATR Indicator
Sounds good?
But now there are different types of breakouts available…
Now let’s dive into the more technical stuff towards trading breakouts.
Shall we?
As for deal breakouts, how to enter a deal
Let’s put things into perspective.
There are three types of breakouts we just talked about.
- trend continuation breakout
- trendline breakout
- volatility breakout
The next step to identify now is…
How exactly do you enter them?
Wait for the candle to close?
Would you like to place a stop order?
Waiting for the “best” market session?
Don’t worry, buddy.
It starts now!
But before we start, let me ask you two questions first.
What timeframe do you use for trading?
The truth is that there is no absolute answer to this.
Given that the market is liquid, we can apply these concepts to any timeframe and most markets.
yes:
- Choose a time slot that suits your lifestyle
- Choose a market where you know how to apply risk management correctly
all good?
Should I wait for the candlestick to close or place a limit/stop order?
After years of using these concepts, I would suggest:
Wait for the candle to close.
You’ll find out when dealing with breakouts…
There is no doubt that false breakouts do happen from time to time!
And it looks like this:
So waiting for the candle to close won’t make it go away, but it will help you avoid most!
Nevertheless…
If you want more techniques on how to avoid false breakouts, I recommend watching this training after you’ve finished working here.