Breakout Trading 101

The current sell-off means that it’s a tough time for many traders. But the markets are on the move – and for adaptable traders, this presents some excellent opportunities to ride those moves.

And one of the best ways to capture moves is to enter the market on a breakout, as the price ploughs through a level of support or resistance.

But breakout trading can be a divisive subject among traders. Which is why I thought I’d tackle some of the myths and misinformation about breakout trading – to get to the truth about what actually works (and what doesn’t) …

Breakout Trading 101

The theory of breakout trading is sound, and very persuasive …

– watch for a price stuck in a range
– it can’t stay in a range forever, so eventually it will breakout
– these breakouts can be explosive
– when it breaks, we catch profits from that explosive move

What’s not to like?

And it’s easy to find fabulous examples where prices took huge breakout moves, with spectacular profits.

A breakout doesn’t have to be from a channel – breakouts can be played as prices butt up to any key level of support or resistance.

Anyone who’s tried breakout trading will tell you that the bane of their lives is false breakouts. Perhaps the price touches through the upper level of the channel before immediately turning tail in a sell-off. Or perhaps it breaks, then pulls back neatly to your stop level, closing you out for a loss, before heading back off in the original direction.

These are frustrating, and – I’ll be honest with you – there is no way to eliminate false moves altogether.

But there are ways to boost our chance of success

The trick is momentum.

A breakout without momentum is worthless. Breakouts are all about momentum. Take another look at the chart above, with those big green candles – those are clear indicators of momentum.

They tell us that there are lots of buyers pushing the price up. Or, in the case of a breakout below support, big red candles tell us that there are lots of sellers, pushing the price lower.

But if we wait around to see those candles – we’ve already missed the lion’s share of that profit. The buyers have already bought … or the sellers have already sold.

So, if we don’t want to wait around for the candles to form, how can we get an immediate momentum reading?

The obvious answer would be the momentum indicator, or an oscillator like RSI …

The chart above shows the same breakout, with the RSI indicator clearly showing higher highs – this tells us that traders have their foot on the pedal for this move. It’s an excellent tool, but – again – it’s fallible. Sometimes prices will dither on the area of support and resistance for some time before momentum builds.

So I’d like to tell you about the trick that’s effectively employed by John Wheatland in his Breakthrough FX system, which I’ve been following for a few months now.

It’s a factor that’s too often ignored by traders, who get bogged down in the ups and downs of candlestick movements.

Time.

John times his trades to match up with the exact moments he knows (from gazillions of hours studying price!) that momentum comes into the market. It’s proving to be phenomenally effective. In fact, you can see the independent track record he’s built HERE.

If you’re not already testing this product out – I’d urge you to take a look.

Click here to trial Breakthrough FX for yourself

Another thing that John’s system does very effectively is managing risk-reward. And I’ll explain here why this works …

The temptation with breakout trading is that we see the text-book examples – the ones where the price flies off 100+ pips in our favour – and we want those kinds of breaks. But – as with all trading – genuine success comes in small parcels.

Just because a key level has broken, and we’ve got some momentum behind it … does not mean that we’re riding a huge move. While markets are notoriously unpredictable – they are also creatures of habit and tend to move within daily ranges. So, we shouldn’t get greedy with our breakout trades.

Sure, sometimes the market makes huge 100pip+ leaps – but we can lose a lot of trades while we wait around for these events to come along.

It’s the old story that (I’m sorry) I bang on about again and again. Take profits, take profits, take profits. It’s an error to sit back and wait for a huge reward on your trade – all the time you’re waiting, your capital is at risk. Take modest profits regularly, manage your drawdowns, and don’t overstretch your risk.

A thrilling rollercoaster ride it is not. But a genuine, long-term profitable one – yes.

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