There are literally hundreds of strategies and their variations in trading, and you can freely experiment with different combinations suitable for your goals and skills. However, there are still several essential strategies that are widely used by almost every trader. If you are just starting your trading career, then you should definitely learn these key techniques to be more successful, and trading with breakouts is one of them. In this article, we explain what that means, how it works, and how you can use it.
Technique basics
Basically, breakouts may serve as signs of new trends in their forming stage, and you can use them in trading to open positions early, before a certain trend really unfolds. A breakout occurs when the price of a certain asset moves about a resistance level or below a support level, especially when there is a sudden surge in volume. Breakouts usually mean that the price will continue moving in that direction for some time, so they provide great opportunities for active traders.
Breakouts are usually preceded by a consolidation stage where active buyers and sellers are trying to break out from the current price range, but none of them can gain an edge. The volume increases, so the price finally breaks out through one of the limits, triggering stop-loss orders and moving further in the same direction. If you can predict these breakouts, you can buy or sell right after one and earn by following the trend, and that’s basically how breakouts trading works.
Possible problems
However, using this strategy the right way is much harder than it seems. First of all, you should learn how to define resistance and support levels, so you will definitely have to learn the basics of technical analysis. But even a correctly spotted breakout may have some problems. It may be short-term, so in just a couple of candles the trend may be reversed by the opposing party, and the price will be again in the range. You can earn on these, too, but you’ll probably need a trading robot to do so.
There are also false breakouts when the price exits the current range but then returns to the range, so you can lose a lot of money by opening a position while hoping that the current trend will continue, but the price will actually leave the range a bit later. That’s why you should pay attention to volume or look only for long-term ranges on the price graph.