(+) Day-Trade Strategies

Price Breakout Strategy

Breakout trading involves entering a strong trend in its early stages. The goal of this strategy is to capitalize on a significant price movement while limiting downside risk.

What is a Price Breakout?

A breakout occurs when the price of an asset moves beyond a defined price level. This level could be a support or resistance line, a channel, a trend line, a Fibonacci level, a pivot point, or similar. Breakouts are significant because they are often followed by strong price swings.

However, be aware that most breakouts turn out to be false. Still, when breakouts are genuine, they can lead to highly profitable positions.

Types of Price Breakouts

Price breakouts are generally classified into continuation and reversal breakouts:

(i) Continuation breakouts

(ii) Reversal breakouts

Continuation breakout

In a continuation breakout, the price breaks through an established level (usually a previous high) and continues trending. The aim is to take profits near the next local high. The longer the price has been accumulating before the breakout, the stronger the breakout is likely to be.

Reversal breakout

The goal of trading reversal breakouts is to identify the final stage of an existing trend. A trend usually ends when the price reaches overbought levels or is halted by a key support or resistance level. Breakout traders aim to enter early in the new trend. However, reversal breakout trading is challenging for inexperienced traders, as most reversal signals turn out to be false.

The problem of lack of volume data

Stock traders know that breakouts should be accompanied by a significant increase in volume. The challenge in Forex is that traders do not have access to aggregate volume data, which is a disadvantage for Forex breakout traders.

False Breakouts and Conspiracy Theories

In general, a false breakout happens when the price of an asset moves beyond a major support or resistance level but then quickly reverses back.

Many theories suggest that institutional players, such as large investment banks, cause false breakouts to trigger their clients’ stop-loss orders and profit from them. Regardless, a false breakout means the market did not behave as traders expected.

Techniques for Avoiding False Breakouts

There are many ways to avoid false breakouts and filter your trades. The downside of filtering is that you may enter later than other breakout traders, but the upside is you can avoid at least 60% of false breakouts.

Here are some tips to avoid false breakouts:

BEFORE THE BREAKOUT OCCURS

(1) Look for volatility. Volatile markets tend to produce more reliable breakouts. You can use the ATR indicator on MT4 (Average True Range) or check recent volatility online at https://www.myfxbook.com/forex-market/volatility.

(2) Identify potential price patterns or formations that may be developing.

(3) Confirm new price momentum with a momentum indicator like MACD.

(4) Look for divergences between MACD or RSI and the actual price action. This is especially useful for confirming reversal breakouts.

(5) Check charts of correlated Forex pairs. For example, if trading an EUR/USD breakout, also review the USD Index and GBP/USD charts.

(6) Avoid trading breakouts during late hours, as these often prove false. Focus on session overlaps when market volume and volatility peak.

(7) Ensure no major news releases will interfere with your breakout trade.

AFTER THE BREAKOUT OCCURS

(1) Confirm the breakout on the H1 chart by making sure the price closes beyond the breakout level.

(2) Place an order that triggers only if the price moves at least 10 pips above the breakout level, ensuring a risk/reward ratio above 2.

■ Trading Price Breakouts

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