Ask yourself, do you have a great breakout trading strategy? Do you have a comprehensive way to identify when a monster move is setting up? How about a plan to manage the trade once you’re in it?
Do you want to learn a breakout strategy that has generated consistent profits year after year on everything from forex, to indices, gold, stocks and oil? We believe it is possible to trade breakouts for a living, that’s how good they are.
Most breakout strategy guides basically do the following:
Take a chart where a breakout has already happened.
Tell you where you should have gone long / short.
Great, if only we could all trade a move after it has occurred. We’d all be billionaires.
We all want strategies that are highly profitable. Strategies that are low risk yet yield big profits.
We have taken thousands of breakout trades over the years in our Live Trade Room and have refined a trading system that works time and time again. Indeed, we take these trades regularly. The examples provided in this guide are actual trades we traded. This is the same in our Swing Trading Strategy guide.
What you need to learn is how to recognise a breakout before it has occurred. That is what this guide is going to teach you. We are going to take you through each step of trading breakouts that work for us and a reliable and consistent source of income.
This starts from identifying the level you think the market will breakout from, to recognising the signs that the market is about to breakout (and likely go on to be a winning trade), to managing the trade once you take the breakout.
If you would prefer to watch a 15-minute YouTube video explaining this guide, then it’s here:
We’re going to break it down into three steps so you can look at a chart and start to plan your next breakout trade. Check out this breakout trading strategy infographic:
The foundation of breakout trading strategies are support and resistance. You need to have the skills to identify S&R. The good news is I am going to give you a very simple way to do it. Here’s the ‘secret’:
Support and resistance levels should be big, obvious and stand out a mile. That’s right, you are not looking for hidden levels or levels other people may not notice. Why is this the case? Because you want to trade off a level everyone is looking at. You need other market participants doing what you are doing, and wanting to happen what you want to happen to make a move work.
You are the little fish riding on the big whale. Don’t worry, little fishes can make lots of money!
Here is a simple exercise for you to undertake to identify support and resistance.
Set your charts up so they just have candlesticks displayed on them.
Strip them of all the technical indicators, moving averages and everything else and have something like this:
Open the chart and mark down the major support and resistance levels as quickly as possible so you have a chart like this:
That’s it. The S&R levels should be immediate and obvious. This is just dealing with horizontal support and resistance. We will look at channel breakouts a little later on. You can do this on different timeframes. Try it on a 5 minute chart, a 15 minute chart, a one hourly and then a daily. You will find major levels on every timeframe.
What does this mean? It means that our breakout strategy can be traded on all different timeframes. Whether you want to day trade or trade for days and weeks.
The ‘pressure and build-up’ of the market is essential to recognise, as it gives us a clear indication when the market is likely to breakout and make for a successful trade. We will break down each component so you can recognise a breakout setting up.
If we are going to trade a breakout we are generally going to be breaking out from a period of sideways price action. We want to see the market start to indicate which side of the sideways market it is going to breakout from.
You will see the market begin to wedge. In this example this is the market making higher-highs towards the resistance level.
What do you think the market is telling us here?
It is telling us the ‘sellers’ (who want to see the market go down) are becoming weaker and weaker. Every time the buying the market makes one of these higher-lows we know the sellers are only able to take the market down to a lesser degree each time.
The wedging, also called a ‘triangle breakout’ is a clear indication there is pressure. Go and look at some charts and see if you can spot markets wedging.
The more times a support or resistance level is tested, the more likely it is to break. We consider this essential for breakout trading strategies. We like multiple tests. Have a look at this chart and see how many times this resistance level is tested:
Multiple times. This is a great indication that the market is ready to explode into the new trading zone. Fewer tests = a greater chance of a ‘fakeout’ (more on that later). It is important to wait for the retest of the level. The more tests = the more opportunity for a wedge, so the two support one another.
It’s all good and well learning how to recognise a breakout, but if you’re not actually in the market you are not going to make any money!
In the Live Trade Room, we use a ‘traffic light system’ where orange is for the trade entry, red for the stop and green for the profit target. This has a few advantages. The first is that it makes our trades very clear to those we send them to. The second is that it instantly tells you the trade direction i.e. whether the trade is a long or a short. If the red line is below the orange it’s a long trade. If the red line is above the orange it’s a short trade.
We want our entry just within the new zone. There’s a balance here between ‘opportunity and confirmation’. The higher we place our order, the more likely we are to avoid a ‘fakeout’ and have a great amount of confirmation as the move will be more developed and have moved away from the zone it has broker away from. However, the more we let the move ride out without getting on board, the more profit we are missing out.
Here are some examples of where we have placed entries on breakout trades:
Never get into a trade without using a stop loss. No matter how good it looks. The reality of trading (yes this means you Mr trying-to-avoid-all-losses) is that you will need to take losses.
There are multiple ways to place a stop loss. We also encourage people we are teaching to trade to ask themselves the following question; “Where don’t I want the market to go?” Now this can be thought of in terms of how much money you’d lose, but this is a poor way to set a stop loss. A stop loss should be set when the pattern is no longer working and the probability of the trade working has diminished greatly.
Going back to wedging, the higher-lows (if long) or lower-highs (if short), these provide you with clear levels (support and resistance levels themselves) for where to put your stop loss.
Here are the same examples, but look where the stops are placed.
Looking to place your stop below or above these wedge levels will answer the question, “Where don’t I want the market to go?”
That’s dealing with the stop loss when the market goes against us. Let’s be more optimistic (because we know the odds are in our favour for the trade to be a winner) and talk about how we trail the stop to lock-in profit.
When we have a successful breakout, we are looking for the market to move away from the sideways zone. In effect it will be trending away. Now trends are never (ok, exceptionally rarely) straight up or straight down. If we are trending up we are looking at higher-lows and higher-highs, and if a downtrend, lower-highs and lower-lows.
Let’s take a long breakout that is up-trending. See how it is making higher-lows and higher-highs:
When the market makes new highs we can manually trail our stop below the pull-backs (higher-lows or lower-highs). This strikes the balance between giving the trade ‘room to breathe’ but also locking-in profit – a positive stop (where it is above the entry level) we start to lock-in profit.
Regardless of where you place your stop, remember the golden question, “Where don’t I want the market to go?”, “Where is the pattern / setup no longer valid?”
There are different ways to take profit. We can use arbitrary profit taking targets based on something like our R multiples (i.e. if you risk £100 you want to make £100 in profit or multiples thereof). Different breakout trading strategies will have different approaches to this. Here is ours:
What we often do is look for market to move the same length as we placed our stop and scale-out (take partial profit) and leave the rest running and trail it. That’s how a breakout trade can turn into a swing trade (we’re not getting into that transition here!).
Looking at this GBP/USD short trade:
We placed our entry stop and initial profit target. Look how we took 50% profit with a profit target around the same distance as we had our stop. We then ran the rest of the trade, trailing the stop above the pull-backs until it was stopped out by a change in the trend. This was an example of how a breakout trade turned into a large swing trade. Here’s the video of that trade if you want to see it in action:
Often the key to profitability, or greater profitablilty, isn’t to win more trades, it’s the lose fewer trades. Any professional trader knows they must take losing trades, but as with any strategy, knowing what indications the market will provide to tell you a trade is likely to be a loser is essential.
This goes beyond merely not following the strategy and these are the following indications with breakouts you need to be aware of to filter out avoidable losing trades.
‘Fakeouts’, otherwise known as ‘false breakouts’ (but easier to remember) are the enemy of the breakout trader. This is where the market breaks into a new zone but then fades and retraces back into the previous zone. Sometimes this happens even when a setup looks great, but other times there are indications this is going to occur.
Here are a few indications the market make ‘fakeout’.
It will come as no surprise that a lack of what we want to see gives us an indication that a market may fakeout. Remember, we want to see wedging towards the support and resistance level and multiple tests of the level. Less wedging and fewer tests are a ‘red flag’.
Remember, you don’t need to take every perceived opportunity due to fearing you will miss out.
An atypical candle is one that should jump out at you as being unusual. That can be due to the way it moves or how long it is. Very often these are based on news and most importantly then more often than not retrace as can be seen with this example.
We wouldn’t use this as a candle to work from in terms of setting up support and resistance.
The temptation is to get overly excited when seeing one of these candles. They make you sense something is happening and that there’s money to be made. We never trade atypical candles. Sometimes they happen once you’re in a trade, and sometimes they help and sometimes they hinder.
Here are some other practical tips to look out for that will help you take big profitable breakouts.
This comes down to timeframes. Whether you’re taking a breakout on a 5 minute, 15 minute, hourly or daily time frame for your breakout, the longer-term trend should be kept in mind.
For example, this is a successful breakout long we took on the SPX.
When zooming out further, you can see the trend is up, which helped support this move.
A very powerful question a trader can ask themselves when considering a trade is, ‘Would they like to do the opposite?’
If you are considering a long, ask yourself, “Would I like to go short instead?”
If you are considering a short trade ask yourself, “Would I like to go long instead?”
The answer you’re looking for to come straight to mind is, “Absolutely not.”
If you ask yourself this question and you find yourself thinking, “Well a long / short seems just as good”, than that may be an indication that the trade may not be a great one to take.
These strategies can be applied on all timeframes. The same principles apply, but with intraday trading we are happy to take one re-test, we don’t necessarily need multiple re-tests of a level.
We take intraday trades using a 5-minute timeframes. We would expect to open and close the trade on the same day.
We also find the indices the best for intraday breakouts. This includes the FTSE, DAX, DJIA and S&P 500. The DAX is an especially favorable market for these strategies.
Check this trade out. Run through the three steps alongside it and see how we did:
You have to remember that events happen a lot more quickly with intraday setups. That means trades executed more quickly, you have to manage them more quickly and make quicker trading decisions. You also have to have the trading discipline and well developed trading psychology to be able to take quick losses and quick wins.
A lot of traders start on short-term timeframes – often because they want to be ‘day traders’, and they fail because it’s too chaotic. We often recommend that traders start off with fewer trades on longer-term timeframes.
Channel breakouts can be classed in two different ways. The first are horizontal support and resistance – what we have looked at so far, and ‘angled’ channel breakouts. The channeled breakouts are essentially using support and resistance but in a different way.
Here the support and resistance requires a little more interpretation. because it is ‘angled’ and not simply horizontal. On a lot of occasions the channel won’t be precise i.e. the highs and lows forming the support and resistance won’t line up perfectly. This means there will be a larger risk of a fake out.
This means when looking for channel breakouts you will need to focus on step two and look for the wedging and re-tests. Look how the market moved on the chart below. The wedge doesn’t swing back down to the support before rallying back to the resistance.
Breakouts should be in any trader’s trading arsenal. They’re one of the most effective ways to get on board with a strong trend and big move. As I wrote at the start, given how many markets there are to potentially trade, we believe it is possible to make a living just from trading breakouts.
Remember the three steps:
If you’re interested in seeing these trades taken live then our live trade room page has more information.
Contact us on the following to find out how we can help you reach your trading goals. We’re even available for a quick chat. We’re not salesman who hide behind a website and emails, we’re traders here to help.
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