Better Ways to Day Trade Breakouts
Contributed by FXTM
14 April, 2020
Many day traders fall victim to the same misconceptions. Breakouts, or moves to a deeper low or a higher peak, are seen as trading opportunities. To be fair, in the intraday environment, this is true. However, as the FXTM trader shows, the approach does not guarantee success.
Whenever a price goes beyond a steady range, many traders open their positions automatically. Some will only sell when the value breaks lower, or buy when it reaches a new high. In reality, there are several ways to trade which are more efficient. In brief, they include the following three scenarios.
- Waiting for a breakout to pass to check if it was genuine. A trade is taken once the value pulls back to a certain area. This will be around its initial breakout point.
- Trading inside a range. Follow the trend direction observed before the range emerged.
- Sticking to prevailing methods, but focusing on special patterns.
Here is a basic overview of these three alternative methods. Simple googling will provide you with multiple tutorials and articles on the subject. Remember, the more strategies you know, the more flexible and shrewd your trading behaviour.
Method 1. Second-Chance Strategy
When you day trade breakouts, your biggest challenge is to see which of them are false. The latter means that the move falls short of your expectations, possibly bringing loss. As the name suggests, this strategy involves testing a breakout before trading it.
False points may be insidious. For instance, the price may seem to be about to break through. Suddenly, the movement is reversed. The obvious way to prevent this is to steer clear of breakout trading altogether.
Alternatively, you could wait and see if the breakout is genuine. You know it was legit when two conditions are met:
- the level is broken through and
- the direction holds.
You can now expect a pullback to the area around this point. This means the value will move in the opposite direction before the general trend resumes. The event is likely, but not guaranteed. If pullback happens, this is the best moment to conclude your trades.
Here is a simple example. Supposing the value was fluctuating and eventually reached a higher high. This is followed by a pullback (a slight drop). Here, you should open a long position after a pullback occurs.
Method 2. Analysis and Anticipation
First, this is a way to hedge risks. Secondly, it can also boost your profits. If you happen to make a loss, it will be minimized. Here is why.
Once in a while, you may spot a range or chart pattern in a bigger trend. This is when waiting for a breakout is unnecessary. In particular, this is true for prices that enter a range after an uptrend. In this situation, you should understand that a breakout up is more likely than a breakout down. Therefore, you can simply buy near the support line, or exit close to the high of the range for a tidy profit.
The way risk is diminished is obvious at the bottom of the rage. If you buy in its vicinity, set your stop loss value just below. Generally, any triangle or range in a larger trend will offer the same benefits. Positions taken inside the limits of the pattern carry relatively low risk.
Method 3. Less Obvious Patterns
Too many players pay attention to the most visible regularities. Aside from the breakouts themselves, some patterns may prove useful. In addition to easily visible ranges, focus on these two:
- triangles and
- flags or pennants.
As ranges are undeniably easier to see, even for rookies, they attract hordes of traders. Some favour breakout trading, while others trade within the bounds of the range. The worst consequence of this competition is the generation of false breakouts.
The patterns listed above have two important advantages. First, on intraday charts, they give cleaner breakouts. Secondly, the risk/reward ratio is better than for any ranges.
The Bottom Line
These are some less orthodox approaches. If traditional breakout trading did not work for you in the past, try these tactics. They should prove more effective. The more different approaches you try, the better your skill set. Knowledge of multiple trading behaviours provides flexibility, which is vital in unfavourable market conditions.
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