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Breakout Trading Strategy

Updated: Oct 18, 2022

What is a Breakout?

A potential trading opportunity that happens when the price moves above a resistance level (going long) or moves below a support level (going short), typically on increasing volume.

How Do I identify a Breakout?

To identify a breakout opportunity, you must first identify areas of support, resistance, or a level/channel where the price is showing support or resistance.

To learn more about Support/Resistance, be sure to check out this simple blog on finding levels of support and resistance

Here is a great example of a breakout from a key level of support going long

Going Short

Now that you have identified the breakout, how do we execute?

There are typically 2 ways to execute a breakout trade.

The first is when the candle CLOSES outside of the area of support, you enter immediately. This can be a great way to get into a trade early in the breakout. The concern of this is you may not have very good position, where your stop is in jeopardy and the price may want to pullback before it continues its breakout.

Remember, no trade strategy is 100%. You must manage your risk and if your breakout fails, use your predetermined stop loss to get you OUT of the Trade. CUT YOUR LOSS, DO NOT ADD ON TO YOUR LOSS by moving your stop loss.

The 2nd way to trade a breakout strategy is to combine the breakout with a pullback/discount strategy. This can be a very effective way to get into the breakout trade, by waiting for it to RETEST the level of Support (when going long) or level of Resistance (when going short).

Below is the same pic as above, and you can see clearly the pullback retest after the breakout.

You can combine the two strategies as well. Should you take a breakout trade without the pullback retest, and the price pulls back, hits your stop, you can now determine if this is a good pullback for your breakout trade. You can combine using the FNL Trade Guide and look for your breakout after a retracement and turn around at a key level (your area of support or resistance) or a FIB Level.

Be sure to use an appropriate risk management strategy and test these breakout strategies in SIM and on Playback BEFORE you trade them with live money. I highly recommend at least 250 trades on SIM/Playback before attempting with Live Money.

As with any new strategy, having confidence and realistic expectations based on a track record that will give you an edge that YOU can capitalize on.

Trade Well at FNL!

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