In today’s article, we’re going to talk all about breakout trading and what are some of the best trading tactics used by professional traders to trade breakouts. Breakout trading is one of our favorite type of entry when trading the markets. Our team at Trading Strategy Guides has developed one of the best breakout trading strategy because it can tell you straight away when you’re wrong which means that you can minimize losses.
Minimizing losses is probably one of the hardest parts to achieve in trading, but with our breakout trading strategy, this should no longer be an issue. To be a successful trader you need not just to minimize losses, but you also need to maximize profits.
If you want to learn how to achieve profitability, we encourage you to read our top notch guide How to Make Money Trading – 2 Keys to Success which has received a lot of positive feedback from our trading community.
The breakout trading principles taught in this article are universal to all markets. You can apply the same breakout trading techniques to stocks, Forex currencies, bonds, commodities and even to the cryptocurrency market, no matter of the time frame.
In order to be able to trade breakouts, you have to know what is breakout trading. This seems obvious, but far too many traders seem to forget about the core basics of breakout trading.
Let’s move forward and get into the basics of what is breakout trading and how it can help you make money trading.
What is Breakout Trading?
In order to understand what is breakout trading, you have to understand that there are two types of breakouts. Our team at Trading Strategy Guides has identified two types of breakout trading setup:
- Support and Resistance breakouts
- Swing high and Swing Low breakouts
So what is breakout trading?
Simply put it, breakout trading is an attempt to enter the market once the price moves outside a defined price range (support or resistance). However, the important characteristic of a genuine breakout is that it needs to be accompanied with increased volume.
If you want a method to be able to identify support and resistance right away we’ve got your back, just read: Support and Resistance Zones – Road to Successful Trading.
A chart speaks more than words can do so here is what support and resistance breakout trading should look like:
Please take a piece of paper and a pen because what you’re about to learn next is very crucial and it needs to be immortalized.
In breakout trading a genuine breakout is followed by a big, bold candle that closes well above the support resistance level. In the figure above, this can be noticed quite instantly. As a rule in breakout trading the bigger the breakout candle is the better.
What is breakout trading of a swing high and swing low?
Well, we apply the same rules as in the case of the support and resistance breakout trading but adding one more filter. What is this filter that we’re talking about? Since not all swing highs and swing lows are created equal we only want to breakout trading those setups that can offer us the best possible outcome.
In this regard, we’re only going to attempt breakout trading those swing high and swing low that have a “V” shape form. A “V” shape form swing high is defined by a strong rally quickly followed by a strong sell off. In reverse the same is true for a “V” shape form swing low.
A price chart will clear any misunderstanding you might have about what is breakout trading of a “V” shape form swing.
You might believe that this in itself can be an amazing breakout trading strategy without adding anything else to the strategy. This is further from the truth because the biggest downfall with breakout trading is that there are just too many false breakouts.
Our team at Trading Strategy Guides has developed the best breakout trading strategy that can distinguish between a false breakout and a genuine breakout. We have tested many technical indicators to develop the best breakout trading strategy and no matter how many backtesting we have done one technical indicator always came first.
Before we move forward, we must define this mysterious technical indicator you need for the best Breakout Trading Strategy and how to use it:
The only indicator you need is the:
Volume Weighted Moving Average (VWMA): The VWMA is a simple technical indicator used for volume analysis. The VWMA is one of the most underused technical indicators that only professional traders use. It might look like a moving average, but what it makes it so special is because it’s based on volume and it’s not just price based moving average.
The VWMA can be located on most trading platforms and once applied to the chart; it should look like in the figure below:
Now, before we go any further, we always recommend taking a piece of paper and a pen and note down the rules of the best Breakout trading strategy.
Let’s get started…..
The Best Breakout Trading Strategy
(Rules for a Buy Trade)
Step #1: Identify a clear price range or a “V” shape swing high and mark that price level on the chart.
The first step of the best breakout trading strategy requires identifying the price level that ultimately it can be your breakout trading level. This is probably the most important part when attempting to breakout trading, so we want to only recognize significant and clear levels.
If you want to boost your knowledge on how to identify these levels, we highly recommend spending 5 minutes and read our Support and Resistance: What Is Going On at These Critical Areas article which should help you identify the right support and resistance level.
EURUSD 1-Hour Chart
The resistance level we have identified in the figure above is quite significant because if you look closely you can notice that each rejection off of the resistance level has left behind a minor “V” shape swing high. We had strong rallies that quickly faded away.
This brings us to the next step of our best breakout trading strategy.
Step #2: Wait for a break and a close above the resistance level
Once the resistance level has been identified from there on it’s just a game of patience and waiting.
We don’t only need a breakout, but we need also the breakout candle to close above our resistance level. This is a sign that the bulls are in control.
We’re not done yet because we still need confirmation from the VWMA indicator, which will give us the green light to pull the trigger on this breakout trading.
Step #3: Buy at the breakout candle closing price only if the VWMA is stretching up.
The final step of the best breakout trading strategy is the needed confirmation from the VWMA. What we visually need to see is for the VWMA to stretch up and the moving average to have a deeper inclination to the upside.
Let’s check this on the price chart…
This can be clearly visualized on the price chart. Prior to the breakout the VWMA only gradually moving higher while after the breakout happened, we saw the VWMA aggressively moving higher showing a strong presence of volume behind the breakout.
After we bought we still need to define where to place our protective stop loss and where to take profits, which brings us to the next step of the best breakout trading strategy.
Step #4: Place your SL below the breakout candle and take profit when be break below the VWMA.
The obvious place to place our protective stop loss is just below the breakout candle because once we break below the candle that initiate the breakout it proves us that this is a false breakout and no real buying is taking place so we better be out of the trade.
Our take profit technique is also quite intuitive because a break below the VWMA suggests there are no more buyers to sustain the current rally so we want to book the profits at the early sign the market is ready to roll over.
Note** The above was an example of a buy trade… Use the same rules – but in reverse – for a sell trade. In the figure below, you can see an actual SELL trade example, using the best breakout trading strategy.
One of the main advantages of the best breakout trading strategy is that you’re trading with momentum on the back of your trade. This means two things: instant gratification and secondly, you’ll learn fast whether or not your breakout trading idea will work
A final tip we can leave you with is that if the breakout has as a catalysts a big new risk event, then it’s more likely that big institutional money are behind this breakout. When you have both the technicals and the fundamentals working for you the probability of a trade succeeding increase considerably.
Our step by step guide into news trading can be very helpful here, so please don’t miss the opportunity to read it.
Thank you for reading!
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