Tips on how to Trade Break Outs

The Breakout Trade

The Setup

For longs, many people like to use moving averages to identify trend and that’s ok, you can try a 20 period moving average. When it’s sloping up, you’re in an uptrend. Next, identify the origin of a strong move in price and draw two lines around the price action to create a demand zone (area “A”). An ideal pattern is the “Drop-Base-Rally”. In other words, area “A” should be preceded by a decline in price. Then, make sure there is a significant profit margin (profit target). This would be the distance from area “A” to “B”, the highest high of the initial breakout before price returns to “A” at “C”.

The Action

Buy at “C” when price touches the top black line and place your protective sell stop just below the lower black line. Adjust your position size so that you are not risking more than you are willing to lose. Place your profit target based on the high of the initial breakout “B” which in this case would have you selling for a profit at “D”.

The Breakout: Two types of entries, very different odds

The Breakdown: Two types of entries, very different odds

The proper breakout entry works in any market and any time frame. A key component to making these work that is beyond the scope of this article is this: When taking any buy or sell entries in markets, make sure you know exactly where price is with regard to the larger time frame supply / demand curve. Whether you trade Stocks, Futures, Forex, and Options, understand that behind all the candles on your screen in all these markets are people and their emotions. Most will fall for the emotional trading traps set by fear and greed, others get paid from this type of novice thinking.

Extracted from FXtechstrategy