Breakout Trading Strategies 101

By on May 13, 2017
breakout-trading-strategies

Learn Channel Breakout Trading Strategies Step By Step

Today I’m going to show you how to incorporate simple channel breakout trading strategies into our trading plan. Often times traders transition from short term trading to day trading using simple methods such as channel breakouts.

I encourage beginners to start off with simple methods and only delve into complex methods when they are consistently profitable. The channel breakout is one of those basic strategies that beginners seem to gravitate towards when they first start out experimenting with different trading methods.

Increasing The Odds In Your Favors

One of the reasons why breakout trading strategies are popular with traders is due to increased volatility and momentum that accompanies the breakout the great majority of time. Although this can substantially increase your profit potential it can at the same time increase your risk of loss just as easily.

Moreover, breakout trading strategies are known for false breakouts, which produce low percentage of winning trades compared to losing trades and many beginners prefer methods that can provide them with high percentage of winners; this helps improve self confidence and assures the trader that they are on the right track.

Avoiding False Breakouts When Day Trading

This tutorial is going to show you some basic filters so that you can learn how to trade intra-day breakouts while decreasing your percentage of false breakouts that occur so frequently. Make sure you follow each step along the way and always make sure you are trading in the direction of the main trend regardless of the time frame you chose to trade.  Also note that this method applies to stocks, futures, commodities and currency contracts.

Market Must Be Trending

The first thing on your list should be a trending market. The biggest reason for false breakouts is taking signals against the main trend. By following the main trend you will increase your profit ratio and increase your percentage of winners to losers. So the first step is to find stocks or other markets that have been trending strongly for at least a few weeks. In this example you can clearly see the stock trending strongly down after a classic reversal double top pattern developed.

breakout trading strategies

Stocks That Recently Reversed Make Great Candidates For This Strategy

Once you identify the stocks or other markets you need to begin monitoring short term support and resistance levels for a strong gap in the direction of the trend. The best gaps will occur at the opening bell with strong momentum and volatility.

breakout trading strategies

The Gap Was Very Wide And Carried Strong Momentum

Once your set up is triggered you place a market order to enter the trade. Make sure the gap is accompanied by strong volume and the momentum is pushing in only one direction. You can usually tell by looking at the opening and seeing how far against the opening price the stock is going. In this particular case the stock moved almost continuously down after the opening bell. There’s very little volume buying this stock at this point.

You Should Monitor The Market Using Intraday Charts When Your Position Is Entered

Monitor The Market Using Intraday Charts When Your Placing Your Entry Order

Once you enter the position you need to place a stop loss or a buy stop in this case because you’re selling short. The stop is placed half way between your entry point and the previous closing price.

For example if the difference between the previous closing price and the opening price this morning is $3.00, you would add $1.50 to your entry price and that would be your stop loss or buy stop order in this case. Profits targets for this method are MOC or Market On Close.

This means that your position will be liquidated within a minute or two of the closing bell. This is called the closing range and during this time resting orders are filled.

breakout trading strategies

Be Patient And Let The Trade Develop Till The Closing Bell

Breakout Trading Strategies Long Example

I start out finding a stock that’s been trending strongly in one direction. The better the trend the higher the odds that the breakout will be going in the right direction. Avoid trying to pick market tops and bottoms when you’re just starting out and go with the main trend.

The Stock Has A Well Developed Trend Under Way

The Stock Has A Well Developed Trend Under Way

Once you identify a strong trend, you should monitor the daily support and resistance levels. If the trend is up you only need to pay attention to the resistance level and if the trend is down you need to pay attention to the support levels. These are critical breakout levels so you should know exactly where they are located.

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The Breakout Should Be Very Directional

Don’t be afraid to enter the position that’s moving quickly. Often times I see traders freeze up when markets are opening and positions are moving quickly. You need to be prepared to execute and know exactly what you’re going to do after the opening bell.

Plan ahead and keep a detailed notebook with your support and resistance levels. In this example the move is fast and carries strong momentum in one direction. You should also look at the market from a daily chart and intra-day charts so that you can monitor the trading action closely while you’re positioned in that market.

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A Wide Gap Demonstrates Strong Build Up Of Buying Pressure

Once the position is filled your stop loss is placed half way between your entry and the previous day’s closing price. The great majority of the time your trade will not go back to that level if it’s working out. This provides you with a reasonable degree of protection in worst case scenarios. Don’t forget to maintain the position till the closing bell to gain maximum opportunity for movement in your direction.

This Strategy Requires The Stop Loss Placed Half Way Between The Previous Close And The Current Opening Price

The Stop Loss Placed Half Way Between The Previous Close And The Current Opening Price

That’s it for today’s trading tutorial. I hope you enjoyed this short tutorial about breakout trading strategies. For more on this topic, please go to: Short Term Trading Indicators – Bollinger Bands As Trend Filter and Retracement Entry Methods Anyone Can Learn

Wishing you the best

By Roger Scott
Senior Trainer
Market Geeks

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