Successful trading requires a lot of discipline, ptience and knowledge; but another key aspect is the trading strategy you choose . No matter what kind of financial instrument is being traded, a strategy is likely to help you remain in control amid the overwhelming inflow of news and data; as well as increase your chances of profiting. Read below about one of the most popular and effective strategies in trading!
About the Breakout Trading Strategy
Before diving into the details about this strategy, let’s clear out the meaning of the term breakout. According to the educational portal Investopedia, a breakout is defined as a ‘stock price moving outside a defined support or resistance level with increased volume’. It typically happens in any financial market and is caused by price pattern breakouts, like flags or triangles.
Breakout trading happens when you enter the market the moment a price is moving outside a certain price range (support and resistance level) and a breakout happens.
How to use the Breakout Trading Strategy efficiently
Don’t be surprised, but there isn’t just one trading strategy that uses breakouts, there are actually dozens of them! However, here are some fundamental steps you can apply to any of them.
● Analyze the chart patterns
When you choose a financial instrument to trade, make sure to study its price patterns that appear on the chart. Formations such as triangles, flags, or head & shoulders patterns are very important.
● The entry point
The entry point on a breakout is typically set by how strong or weak the market is. When the prices are set to close above a resistance level, the trader will establish a bullish position, whereas when prices are set to close below a support level, the trader will take on a bearish position.
● The stop loss
Setting a stop loss order will decrease the risks of the breakout trade. When you decide to exist with a stop loss order, set it according to the prior support or resistance level beyond which prices have broken.
● The exit
If you don’t want to opt for a stop loss order exit, then the best thing to do is when you reach your time target or the price of the financial instrument you’re trading reaches its target.
Breakout Trading Strategies – Pros and cons
Breakout strategies have been used for centuries and a lot of traders, both novice or experienced, still use it. While they can bring you the money you’ve been dreaming of in just a few moments, they also carry some disadvantages you should be aware of. Here is a list of the main advantages and disadvantages of breakout trading:
Pros of breakout trading
o Limited Risk: the confirmation of a trade’s failure can come rapidly, allowing you to exit the position quickly.
o Profits: if the trend is strong, there are chances of gaining substantial profits.
o The trend is a great ally: it is basically impossible to trade against the trend with a stop loss.
Cons of breakout trading
o The false breakouts: signals can sometimes be tricky and you might end up opening a trading position on a false breakout.
o The market conditions: it can be quite challenging to enter the market at the right time.
o An intraday breakout is not assured: some breakouts can give returns in a few days.
It is extremely important to mention that the online broker you choose to trust with your trades plays a big role. Features like the trading platform and the customer support assistance can make the difference. TradeFW.com is a great example of how the services of a broker can increase the efficiency of your trades. The investment company offers its clients the popular MT4 trading platform, with advanced and customizable charts that will help you identify the best entry points. Moreover, the superior customer service available 24/5, as well as the outstanding educational materials & daily analysis will guide you towards making informed decisions. An overall professional and modern trading environment is vital for you, especially when using breakout trading strategies.
There are dozens of breakout strategies out there, whether you choose to trade forex, commodities, stocks or any other assets; but they can all be successfully applied following a few fundamental steps. These strategies are known for the limited risks they hold, as well as their potential of bringing huge profits when used right. The online broker you pick is an equally important decision, because the trading process and results depend on the quality of its services. All in all, remember that it takes time for any strategy to pay off, so be patient, learn from your mistakes and stay focused on your goals.