Trade77 Tutorials; Breakouts


Hello Traders, I’m Mani and I’m the writer of Trade 77 section, please follow me on twitter for further updates.

What is a breakout?
Breakout is a move beyond some prior significant level such as a round level or strong S/R areas. Breakouts could be used in swing trades and also for intraday and scalping. Depends on the method we are using, breakouts have got different profiles. I will show you some examples of these breakouts but before getting started I want to classify breakouts in two groups:

  1. Suspect Breakouts
  2. Legitimate Breakouts

Suspect and Legitimate Breakouts Specifications:

  1. Breaking with low volume:
    Volume is one of the most important points for considering a breakout as false or true one. So many traders have asked me about how to determine volume in the Forex market and here I want to say another categorical “NO” to indicators; I don’t use any indicators such as CCI, ATR or Bollinger Bands or so. The only thing I use here is “Price Action”.
    Let’s see daily chart of EURUSD here for better perception:

    If you see this figure you can easily find out when we had got low volume and when we had high volume. So when you are trading the daily chart and you are waiting for a possible breakout then 80pips range or even 100pips range bars could not enough for a possible legitimate breakout and you should wait for above 150 or 200pips range bars in order to consider it a true breakout.
    Do not trust breakouts when market is in range; when we have low volume then market goes sideways and in these cases it won’t act good to technical levels and price patterns.
  2. Incorrect market timing:
    Market timing is one the best filters that you should apply into your breakout methods. This is not seperated with the volume filtering even it is a way to determine low volume and high volume price actions.
    Asian session and late on NY session (after 15:00 NY time) is the period of false breakouts. Do not trust breakouts in that period of time.
    In the other hand in the London session and early NY session you can be more confident of breakouts.
  3. Unimportant levels:
    Breakout of unimportant levels is not a good trading signal and many traders do this fault everyday.
    Important levels can be found easily; More touches of a level, more important that level tends to be.
  4. Importance of the closing price:
    Impatient traders won’t comfortable to wait and will trade whenever price breached that significant point. Always beware of head fakes and long tails which are indication of price wanted to attack that level again and will reject sharply with a long shadow. Wait for candles to close above or below that level before considering a breakout has taken place.
  5. Amount of time spent in the consolidation phase:
    Before important breakouts we should have a very tight range which is called “consolidation phase”.
    The longer the amount of time spent in the consolidation phase, the stronger the breakout tends to be.

    In the figure above you can see Cable had a consolidation phase for almost 10days this was an indication of an important level is there and a breakout would make more than 500pips in the direction of the breakout.

Other Notes and methods:

  1. Two candle closes method:
    Many traders will wait for a confirmation after a breakout formed, their confirmation is to wait for two candles that close completely below or above that level. This filter is a great tool to find suspect breakouts.
  2. Finding breakouts sooner:
    When you are trading trendline breakouts you should apply two things:
    a) More touches of a trendline and more important that trendline would be.
    b) Finding sooner breakouts by drawing steeper trendlines.

    In the figure above you can see a false breakout of trendline #1 but you could go long sooner at the breakout of trendline #2 which was the steeper trendline.
  3. Currency pairs profile:
    It’s very important to have a good perception of the pair you are trading. GBP crosses love false breakouts as they like new fresh swing highs/lows. So you should beware of trading breakouts in these pairs and have to wait for more confirmations before taking positions.
  4. Trading the retest:
    Patient traders usually will wait for the price to create a distance after breaking an important level and then will take positions when price went and did retest that significant level again.

    In the figure above you can see this process, we had got a great breakout of that zone and price sharply increased and made a great distance to that zone. After that we had got a correction move and price did retest upper bond of that zone and indicates a great long setup.
  5. Using volume bars to have a better perception of volume:
    You have got a volume indicator in your trading platform for sure and you can use them to find out high volume and low volume situations.

    We can compare volume bars and with drawing a line we can find out the volume is increasing or decreasing.

Make sure that you are following me on twitter so you can be informed of any trade calls and updates and if you found this post useful let your followers to read it too, so please retweet this article with the button above of the article.

Regards

Copyright secured by Digiprove © 2010

The following two tabs change content below.
Winners Edge Trading was founded in 2009 and is working to create the most current and useful Forex information and training available on the internet.

Winner’s Edge Trading, as seen on:

Winner's Edge Trading in the news

  • Greg

    Great, thank you. I was waiting on such summary about breakouts

  • Anonymous

    Thanks for reading and commenting as well.

  • shalom

    thank you

  • Anonymous

    Thanks my friend.

  • 4xDudess

    VERY fine job, Manimohseni. Thank you for sharing so generously.

  • Dkoster77

    Mani, Thank you for your sound advice. It is truly appreciated. Daryl

  • Dkoster77

    Mani, Thank you for your sound advice. It is truly appreciated. Daryl

  • Anonymous

    Thanks for your comment.

  • Anonymous

    Thanks and glad you liked it.

  • Chinwendu

    Thanks for this lecture

  • Anonymous

    Thanks my friend. I don’t like the idea of high/low of previous candle. You should choose your stop wisely. Stop is a fight between you and the market so if you want to catch more than 100pips then you have to ready yourself for a more difficult fight. Use previous H1,H4 and Daily swing high/lows are my best stops. Also I don’t like to move my stops at all, when I’m trading swing positions I will set my stop, target and then I will close my platform. My swing account is different from my intraday and scalping account and I highly recommend you to this, it’s a great way of building discipline for your swing trades.

  • Anonymous

    John, thanks for your comment and glad you liked it.

  • Dkoster77

    Mani, Your articles are very thorough and simple to follow. When you see a breakout pattern would you place the stop on the low or high of the previous candle? Do you look for a probable exit and leave your stop in place or do you move your stop when in profit? Thank you again for thoughts. Daryl

  • John Higgins

    I like the examples, very clear and easy to understand.