Many day traders start their journey learning breakout day trade strategies because of their ease and simplicity. However, many fail with this strategy because they either enter too early or too late of the breakout. This article will discuss what a breakout trade is, how to identify it, and some easy strategies to trade breakouts.
What Is a Breakout?
A breakout trade occurs when a stock or equity’s price breaks above or below a specific point on a technical analysis chart. These price points act as a form of support and resistance levels on the chart. To identify a breakout on a stock chart, pull up your trading platform and look for areas on the chart where prices stayed in a particular range or area.
Eventually, the prices moved either higher or lower from this area. In these cases, the trader waited for a significant price movement to break the current pattern. See the example breakout chart below.
As you can see, breakouts are a pretty straightforward pattern you can identify on a chart. The good thing about them is that they do not require any technical indicators to be placed on charts to identify them. You can easily see them on the chart itself. They rely totally on what prices are doing now and can be identified with the naked eye. They can appear on all chart timeframes and for all equity markets, whether you trade stocks or options.
So, let’s now discuss some tips when breakout trading.
- False Breakouts: The most frustrating part of trading breakouts is receiving false signals. False breakouts are when you enter a position in a stock that has broken out of the price structure, but the stock fails to continue, and the price moves back in the opposite direction.To avoid false breakouts, wait for a few candles to confirm the breakout or wait until the stock price returns to the point where it broke out and retests that level. Don’t worry. We will provide an example of this in the strategies below.
- Set alerts: Another tip for trading breakouts is to set alerts. Once you have identified an area for a potential breakout, set a price alert if it breaks out above or below that level. This way, you are not spending time looking at a chart anticipating the breakout to occur while missing out on other things you can do with your time. Once the alert is triggered, you can come back to your computer and review the chart to decide if you want to take a trade.
- Trade with the trend: It is also essential to review the trend that the particular stock is following to serve as additional confirmation in the direction of the breakout. Often, breakouts in the opposite direction of the price trend may result in a false breakout. To confirm the trend, look at a higher timeframe than the one you are trading from and determine the most current market direction.
- Look for momentum: When trading breakouts, price momentum, and volume are your friends. To avoid false breakouts, look for strength in the price move to confirm that that price will continue in the desired direction. To do so, look for volume spikes and strong buying pressure or strong selling pressure in the breakout direction.
Breakout Trading Strategy
Now, let’s look at the overall breakout strategy and identify some breakout patterns to look for on a chart.
Once you have identified an area on your chart for a potential breakout, draw a rectangle around the area so that you can visually see this area. Then, as mentioned before, set an alert above or below the breakout area in the direction of the trend.
Once the alert is triggered and the breakout occurs, you have two options:
1. Enter the trade in the breakout direction, which could result in a false breakout, as mentioned before.
2. Wait for the price to retrace back to the breakout area and test it to ensure that the price wants to move in that direction. This approach is a safer method. However, it may require additional waiting to get into the trade. In this case, wait for the price to leave the area and set an alert near the breakout point. See the example below of the retest.
In this case, you can see where the price has broken out and came back to the breakout point and confirmed the move. A false breakout could have resulted if we entered upon the initial break. It is essential to avoid as many false breakouts as possible to ensure you remain profitable.
Here are some breakout types that you can also look to trade.
Breakout From a Range
In this example, we see a range formed within the rectangle’s high and low points. We would be looking for it to break out either above or below this range, depending on the trend.
Breakout From Consolidation
This example is a breakout for a tight consolidation period. This breakout type can be easily identified on a chart because the price is so close in range. We also look for it to either breakout higher or lower. We would expect a substantial price movement in either direction for tight consolidations.
Breakout From Flag Patterns
Lastly, here is a breakout from a flag pattern. As you can see, a flag is formed on the chart, and the price is contracting. Thus, from the contraction, the price must decide to move higher or lower.
Summary: Breakout Day Trade
Day trading breakouts are one of the strategies that many traders begin their journey with, as the pattern is straightforward. However, this strategy requires a lot of patience to wait for the breakout. It also requires quick action to enter the trade once you have confirmed the breakout.
However, it can be a profitable strategy for a new trader and is available for all trading markets (stocks, options, forex, or futures).
Although breakouts can be profitable, our day trading program offers a more simplified strategy that does not require the same patience as breakouts.
To Learn More
Maurice Kenny has helped over 600 people become financially free through one-on-one coaching, mentorship, and options trading strategy. Many of these new traders are now full-time traders, and they all started by watching his 1-hr webinar.
Feel free to check out other FREE educational resources to help guide you as you begin your new journey to financial freedom.
Also, download a (FREE E-BOOK) by Maurice Kenny, “DAY TRADE LIKE A MILLIONAIRE.”