Breakout Trading
A trading strategy based on price moving beyond defined support or resistance levels with momentum.
Plain English Explanation
Breakouts are like a dam breaking - once price pushes through a barrier, it often moves with force.
**Types of breakouts:**
1. **Range breakout:** Price escapes a horizontal range
2. **Trendline breakout:** Price breaks a diagonal S/R
3. **Pattern breakout:** Price completes a chart pattern
4. **News breakout:** Catalyst drives price through a level
**What makes a good breakout:**
- **Volume:** Should increase significantly on breakout
- **Momentum:** Candle should close strong beyond the level
- **Retest:** Often price comes back to test the broken level
**The danger of false breakouts:**
Price breaks a level, triggers stops, then reverses. This is called a "fakeout" or "stop hunt." They're common, which is why confirmation matters.
**Better approach:** Wait for candle close beyond the level, or wait for retest of the broken level as new support/resistance.
How It Works (Technical)
Breakouts occur when accumulated buying or selling pressure overcomes a barrier. Stop losses above resistance and below support create additional fuel when triggered, accelerating the move.
When It Works Best
- After tight consolidation (volatility contraction)
- At major support/resistance levels
- With volume surge (2x+ average)
- When broader market supports the direction
- On higher timeframes for more reliability
When It Fails
- Low volume breakouts (usually false)
- Against the larger trend
- In choppy market conditions
- Near major news events (can reverse quickly)
- When too obvious (everyone watching same level)
Common Beginner Mistakes
- 1Chasing breakouts without confirmation
- 2Ignoring volume (most important filter)
- 3Trading every breakout (be selective)
- 4Putting stops too tight (need room)
- 5Not having a plan if it fails (stop out quickly)
Pro Tips
- Wait for candle close beyond level, not just wick
- Retests of broken levels offer lower-risk entries
- Higher timeframe breakouts are more reliable
- Look for multiple confirmations (volume, momentum)
- False breakouts in one direction often lead to true breaks in the other
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