Easy Breakout Trading Strategy (So Simple Yet So Powerful)

Hello guys, in the following minutes I will
show you a simple but powerful trading strategy that will help you to take advantage of failed
breakouts. As you probably know, one of the classic rules
of support and resistance is that support, once violated, becomes resistance and conversely,
resistance, once violated, becomes support. We can find many examples of this principle
in real market action. This chart shows a classic example where a
resistance level held at point A, was broken at point B, and then held cleanly as support
on a retest at point C. This chart shows another example where previous
support was broken, but then held as resistance on the next retests. These are textbook examples of price action
around support and resistance levels, but there is one small problem. Only 15%-20% of these price moves are valid,
and the rest ones are simply failed or fake breakouts. A false breakout is when price moves beyond
the previously established price range but then retreats back to within the range. Since a range is basically a battle between
buyers and sellers pushing in opposite directions, these false breakouts often occur because
support and resistance are not 100% accurate. Here’s a harsh truth: for most novice traders,
trading breakouts will be a losing strategy. The trading reality is that explosive gains
are quite rare considering the many potential ranges available to trade, and even if you
anticipate the breakout correctly, you will still face problems with maintain the position. But while a range breakout may be difficult
to trade profitably for many traders, there are alternatives using the same chart pattern
that give the trader a better chance at success. This is the pattern that we will try to spot
on our charts and here’s the logic supporting this strategy. Markets hunt for stop orders and activity
beyond significant price levels. Many times, there is no real conviction behind
these moves, and the price moves fail and reverse quickly once the stop orders are triggered. If this breakout occurs and fails, there will
be many trapped traders, which can add momentum to the opposite direction from that level. Entering after such a move allows for excellent
reward/risk potential with a clearly defined risk point. The best examples of this trade occur in extended
ranges, and will usually be accompanied by a momentum divergence on the trading time
frame. In this example, for a short entry, the market
trades above a clearly defined resistance area, but immediately reverses on the following
bars and closes back under the resistance. There can be significant volatility, volume,
and activity on the breakout, but there should be no real continuation beyond the level. The final confirmation of the fake breakout
is the momentum divergence Here’s another example. We have a clear support, the price being unable
to continue lower. Point A marks a brief breach below support,
but immediately closed back above the support level. Once the movement was confirmed by the divergence,
the wiser trade would be a long trade, instead of chasing the failed breakout. On the XX chart, we found this pattern once
again. The price attempted to break to new highs,
but there was not enough buying pressure to hold it above the resistance level and it
failed on the same day. The divergence was there, so the higher probability
trade would be on the short side. This charts shows another classic example
of a fake breakout. After the resistance was broken to the upside,
the first instinct is to “go long” for a continued trend run above the previous highs,
but the market actually closed below the resistance level and reversed. When we trade this setup, the stop is clearly
defined: just beyond the extreme of fake breakout. Because this is an aggressive countertrend
trade, it is important to not add to losing trades or widen the stops. So, respect the stop level without question. In what concerns the profit taking, allow
yourself to take partial profits as the market makes them available to you. For instance, one plan would be to take profit
on the first part when the profit equals the initial risk on the trade, meaning a 1 to
1 ratio. The profit target on the second portion is
discretionary. I prefer to swing trade with this setup but
this pattern also suits scalping. You will find many false breakouts on the
1-min charts, you just have to manage your trades accordingly. The beauty of this failed breakout technique
is the fact that there is no subjectivity in stop location and little subjectivity in
managing losing trades—if the market makes a new extreme, then you are wrong and must
exit the trade. Here’s an important observation. Ideally, the market should not be able to
consolidate near the level. Consolidation near the level is more consistent
with a continuation of the existing trend. If the failed breakout is successful, price
should move sharply away from the level. Once you find yourself in a trade where the
price doesn’t moves or stagnates for too long around the entry points, cut your losses,
exit the trade and search for better trades, with hopefully more momentum behind them. If you got any value from this, please consider
subscribing to our channel, share and like this video, as it would help us a lot in the
future. Until next time.

Leave a Reply

Your email address will not be published. Required fields are marked *