Best Price Breakout Strategies
The essence of price breakout strategies is to determine the range of price movement and open trades at the moment of breakdown of its boundaries. A breakout can be true or false, therefore, determining the strength of the trend and placing pending orders triggered by a true breakout is of key importance.
Range boundaries can be drawn in several ways:
- Using channel indicators. For example, Bollinger Bands, Darvas Box, Keltner Channel.
- With the help of leveling tools. For example, building levels based on local extrema on different timeframes, setting Fibonacci levels, etc.
- Using trend indicators and pivot points. These tools are able to show the strength of the trend, thanks to which it is possible to predict a future breakout or rebound from key levels.
Graphical analysis can also be added to the above tools, providing confirmation by patterns.
Examples of price breakout strategies
- Instant breakout… A scenario according to which the price continues to move after touching a resistance or support level without a rollback (local correction). The breakout is instantaneous, the rate of price movement is high, so the trader must make a decision almost instantly. It is very easy to miss a convenient entry point here, but at the same time, such a breakout is guaranteed to bring profit, since the probability of a reversal is almost zero. Alternatively, such a position can be insured against a trailing reversal. An example of such a breakthrough is shown below.
The reason for such a breakthrough is most often a fundamental factor, less often – the entry into the market of a large market maker in a market with small trading volumes. It is most convenient to catch such breakouts at the moments of news release or at the moments of exiting a flat.
- Breakout on pullback… An easier price breakout strategy for a novice trader. Its essence is that after the first breakout, the price returns to the level border again, bounces off it and continues the main movement. The trader has time to make a decision and look for a breakout confirmation. An example is shown below.
The price touched the resistance level and moved away from it. Then it returned to the level again, broke it and went up after a local correction. Sometimes there is a double bounce – the price returns to the channel border twice, forming a “double top” or “double bottom” pattern.
- False breakout… A price breakout strategy that involves opening a trade towards the price return to the middle of the channel. The price breaks the level, but the strength of the trend is not enough to continue the movement and the price returns to its range.
The price was in a flat for a long time, allowing a strong support level to be drawn at three extremes. A breakout of this level could mean the beginning of a bearish trend, but the price returned to the level again. In accordance with the price breakout strategy on the pullback, there could be a local correction here with the continuation of the downward movement. But the breakout itself turned out to be false – the price went up.
All three types of breakouts can be used to build a trading system at the same time. To do this, you need to teach how to correctly build support and resistance levels, as well as draw a trend line.
This is an example of a strong hourly breakout strategy.
Another interesting strategy is often found in reviews from many analytical resources. Under the name “London Breakout” (or in other variations), several trading systems are collected, the essence of which is to open deals at the start of the London session for the GBP / USD pair. It is based on the fact of a sharp increase in trading activity at the end of the Asian session. In general terms, the principle of the system is as follows:
- On the hourly GBP / USD chart, a price channel is being built during the Asian session.
- At the end of the Asian session, Buy Stop / Sell Stop orders are placed on a small M15-M30 interval above / below the channel boundaries. Mirror-like feet are set in a similar manner. The length of stops is 5-10 points, the length of pending orders is 5 points from the channel borders, the target profit is 20 points.
A strategy for breaking the “flag” can be built in a similar way. “Flag” is a pattern representing a diagonal corridor of price movement, which the price breaks sooner or later. On the main trend, the formation of such a pattern means a local correction. An example is shown below.
How to protect against false breakouts:
- Pay attention to patterns. The above example of a “flag” excludes the possibility of a false breakout.
- Trade with the trend, catching strong impulse movements.
- Place stops and open trades only after a local correction (do not use an instant price breakout strategy).
Learn to quickly identify chart patterns, do not be guided by emotions, choose timeframes from М30-Н1 and luck will definitely favor you! Happy trading!