Trade Breakouts – Introduction
Success in trading depends on one major thing; how you identify opportunities and maximize on them. This is a secret I learnt a few years ago when I started trading full-time. If you are able to identify when an opportunity arises, then chances are high that you will make a lot of money. Unfortunately, identifying these opportunities is one of the toughest thing to do. Furthermore, if we all did that, then we would all be rich. Right? No. Only a few people have succeeded in identifying the opportunities and maximizing on them. The idea is that you want to identify a point in time when the price of an asset breaks-out. For instance, if the price of crude oil is ranging between $40 and $42 a barrel, you want to identify a point where it breaks out and goes far up or down. In this article, I will highlight three key ways to identify and trade breakouts.
#1 – Trendlines
This is one of the most commonly used methods of identifying and trade breakouts. The idea is to look at the chart, identify the highest and lowest points and then plot a line. The line will of course not touch all the points you identified but you should ensure that it touches a few of these points. After this, you will look at the chart and make a decision on whether a breakout will be imminent or not. The trendline can either move up or down. If you spot an opportunity where the breakout is imminent, then you should make a buy or sell decision. The chart below shows a simple way of identifying a breakout using a trendline.
#2 – Channels
The second strategy you can use to spot and trade breakouts is using channels. The idea behind channels is similar to what trendlines do. The only difference between the two is that in a channel, you draw the trendlines in the two sides. In this strategy, you want to connect the highest points and the lowest points in the opposite direction. By doing this, you will come up with a channel and therefore you can easily spot the breakout point. The chart below shows how to draw a channel.
#3 – Triangles
The third strategy to trade breakouts is the use of triangles in analysis. Again, the idea involves drawing of lines as in the above method albeit with the aim of producing a triangle. You simply want to draw two lines, touching the tops and the bottoms to form a triangle. When the triangle is formed, chances are that there will be a breakout there. There are three types of triangles you can look at. They include: ascending, descending, and symmetrical triangles. Ascending triangles are created when there is a resistance level and the market price continues to make higher lows. It is an indicator that the buyers (bulls) are making momentums over the bears. The descending triangles are formed when there is a support level and the market price continues to make highs. Finally, the symmetrical triangles are formed when the bulls and bears create higher lows and lower highs, forming an apex in the middle. The chart below is a good example of a symmetrical triangle.
When using this strategy to identify the breakouts, it is important to consider a few details. One, you need to consider the timeframe that you will be using. In this, you should test various timeframes to ensure that you are in the right direction. The next thing you need to consider is that there will always be fakeouts, Fakout is a name used to mean a false breakout. You should learn how to identify these. Third, you should test different indicators which you will use to test the performance of the strategy. Lastly, you should identify the best currency pair, commodity, or stock to implement this strategy.
Trade Breakouts – Useful Links
- Discover more about trading breakouts on Investopedia
- Read more strategies on how to trade breakouts on Thestreet