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Improving your breakout strategy

Nick Goold

Markets experience increased volatility and large price movements when they break out of highs (resistance) and lows (support). Price movements become more active and more difficult to trade, especially when they are important values that many traders are interested in. In this article, you will learn how to use a good breakout strategy when a new high or low is reached.

When you just look at the charts, it seems so easy to think that trading is just about finding a big trend and taking big profits. Indeed, riding the trend wave is certainly the best strategy and the best way to make big profits. However, the difficulty of trading lies in entering at the right time, otherwise you will lose money due to price movements before you can make a profit. 

One popular trading strategy is to buy when prices are above a key high or sell when prices are below a key low. Although this strategy seems very easy from looking at historical charts, it is not so easy in real time. This is because the sell orders for the range strategy are near important highs, and similarly the buy orders for the range strategy are near important lows. There are many orders near important prices, and market movements are accordingly more complex. This jostling between trend and range strategies increases volatility and makes trading near resistance and support difficult. 

Types of breakout strategies 

Buy breakout

Breakout selling

Breakout false break buy

Breakout false break sell

How can these breakout strategies be used successfully? Let's look at five specific points.

Five key points for trade timing

1. Check market conditions

It is always important to know and understand the market situation before trading. When moving averages are flat, there is no trend and there are fewer opportunities to generate profits with a breakout strategy. For example, if the moving average is flat, you may not want to buy in a situation where the price is above a high. This is because prices are more likely to come back soon. 

2. Do not wait until a breakout 

If the market has strong momentum and is about to test resistance or support, opening a position before the break can make your entry more advantageous. By entering earlier than other traders, you can close with a small profit, or even plus or minus zero, even if the breakout does not occur as expected. For example, buying Nikkei 225 futures at 16,975 before resistance at 17,000. 

3. Is the market oversold or overbought?

If you feel that the price is moving too fast, be careful not to get caught in a false move. In such cases, check the divergence between the price and the moving average. The greater the divergence, the easier it is for the price to return to the moving average. Therefore, even if you think you have broken support or resistance, you may soon see a retrograde move, increasing the likelihood that your breakout strategy will fail. In overbought or oversold conditions, wait for price movements to settle down and the market to return to its moving averages before implementing a breakout strategy. 

4. What time of day is it now?

Markets move differently at different times of the day. You should use historical charts to understand whether the time of day tends to be range bound or trending. Once you have an understanding of the market conditions that tend to prevail in a given time zone, you can select the time zone of a trending market that is suitable for your breakout strategy and wait for trading opportunities. 

5. Understand the news

News and economic indicator announcements have a significant impact on the market. As it is difficult to analyse and forecast news in real time, try to understand the potential of news and economic indicator releases in advance. Among other things, volatility can help you decide whether or not you should use a breakout strategy. For example, a breakout strategy when the market is waiting for a major economic announcement could lead to significant losses. This is because the price movements can be volatile and directionless. On the other hand, if you are waiting for an important news announcement and the price movement is in a trending direction, the chances of a successful breakout strategy are greater.

Deepen your understanding of these five points of trade timing and repeat the practical practice of breakout strategies in demo trades. As your trading performance improves, the stress you experience when trading will also be reduced.