Breakout trading is one of the strategies of traders in trading itself. This time, we will discuss breakout trading. To find out more about breakout trading, you can read the following article. Don't forget to subscribe to YouTube GIC to stay updated on News that will be broadcast live every day.

What Does Breakout Mean?

Breakouts are a subset of technical analysis that allow investors and analysts to determine whether a security’s price will move higher or lower after breaking through what are known as resistance and support levels. Analyzing breakouts is ideal for intraday trading and during times of volatility — where there are large swings up and down over a period of time — in futures and spot markets on assets and securities including stocks, bonds, forex, commodities, and cryptocurrencies. Breakout analysis tends to work best during times of short-term volatility and in the absence of news that might cause a sudden change in stock prices. Breakouts can be found using technical indicators such as the relative strength index and moving averages.

What is Breakout in Trading?

The type of trader who uses the breakout trading strategy is called a breakout trader. This trading strategy tactic looks for areas or levels where the stock is unable to move above and beyond. A trader who practices this method waits for the stock to move higher. When the price rises above the point where the stock has been stuck for a period, the event is known as a ‘breakout’. When a stock remains at a stagnant level in terms of its price, many traders tend to shift their focus to other securities that offer more dynamic movements, wanting the trade to become profitable more quickly. The breakout strategy involves a degree of patience as the trader waits for the security to move higher than a certain level that has been held for a while. Some breakout trading experts use technical analysis to identify patterns and trend prices. For example, breakout traders look for periods where the security’s price has shown resistance to moving above or below a certain price range. After this, the breakout investor attempts to profit by entering a trade in the direction of the breakout. Traders do this by predicting that the price will continue to move in the same direction.

What is Breakout Trader?

A breakout trader is a type of trader who uses a breakout strategy. This strategy looks for levels or areas that a security cannot break through, and waits for it to break through (because it can continue moving in that direction). When price moves through one of these levels, it is called a breakout . Many breakout traders use technical analysis to identify these areas, often using trendlines or price patterns. Breakout traders look for patterns, such as instances where the price of a security has been resistant to moving above or below a certain price level or price area. The trader then attempts to profit by entering a trade in the direction of the breakout, assuming that price will continue moving in that direction.

Breakout Trading Strategy in Forex, and Crypto

Here are the strategies for breakout trading in forex and crypto. The strategies are:
  1. Identify a clear price range or a high “V” shaped Swing and mark that price level on the chart.
The first step of the best breakout trading strategy requires identifying price levels. These can ultimately become your breakout trading levels. This is the most important part when trying to trade breakouts. This is why we only want to identify levels that are significant and clear.
  1. Reduction in reaction (or pullback from that support/resistance level)
Why would a pullback from a key support or resistance level help your breakout trades? Let’s say the market is in an uptrend and faces a resistance level where a pullback is likely with supply rising at that level. If the bulls hit the resistance level the first time, and the market pulls back say 50 pips, then when the 2nd price action hits that resistance level, the market only pulls back say 25 pips, this indicates a weaker reaction from the bears at the level.
  1. Wait for break and close above resistance level
Once the resistance level is identified from there, it will just rely on the patient game to wait. We need a breakout and the breakout candle to close above our resistance level. This is a sign that the bulls are in control.
  1. Buy at the close of the breakout candle only if the VWMA is stretching.

The final step of the best breakout trading strategy is the confirmation needed from the VWMA. We need to visually see the VWMA stretching. And the moving average needs to have a deeper upward trend. This can be clearly visualized on the price chart. Before the breakout, the VWMA was only gradually moving higher after the breakout occurred. We see the VWMA aggressively moving higher, which indicates the presence of strong volume behind the breakout. 

How to Do Breakout Trading

Below are 7 steps you can follow when trading breakouts:
1. Identify Breakout Candidates
One should find trades with strong support or resistance levels. It should be noted that the stronger the support and resistance levels, the stronger the breakout movement.
2. Wait for the Breakout
Finding a good trading chart does not mean that a trade can be made before the breakout. Instead, one should wait patiently until the price on the chart moves. Once a breakout occurs on a day when the price is trading outside the support or resistance level, and to ensure that the breakout will hold, one should wait until the closing price to make a trade.
3. Set Reasonable Goals for Breakout
If you are going to trade breakouts, then set an expectation of where it will go especially when trading chart patterns. If you don’t set one, then you won’t know where to exit the trade.
4. Let Retest
This is the most important step when trading with breakouts. So when the price has broken through the resistance level, the old resistance becomes the new support. When the price is breaking through the support level, the old support becomes the new resistance. In most of our trades, the stock will usually test the level it has broken through after the breakout, so one must be prepared for that.
5. Know When Your Trade/Pattern Fails
If price is retesting the previous support or resistance level and breaks through it again, then this is where the pattern or breakout has failed. At this level, you should accept the loss. Remember one should never gamble with their losses!
6. Exit Trade Towards Market Close
One cannot tell at the open if the price is holding at a certain level. This is the reason why most traders consider waiting until the market close to exit a losing trade. If a price stays outside a predetermined support or resistance level towards the market close, it is time to close the position and move on to the next one.
7. Get Out at Your Target

If you do not exit the trade, it means you are in the trade. One must remain in the trade until the price has reached its goal or time target without reaching the target price. After learning about breakout trading along with how to do it and its strategy, you can start implementing trading using this breakout. Then you can register to start trading with GIC!