Breakout trading is a strategy based on buying or selling an asset after its price moves beyond a defined support or resistance level. This breakout is usually accompanied by an increase in trading volume, signaling a potential continuation of price movement in the new direction.
Essence of the strategy:
1. Identifying support and resistance levels:
Traders identify significant levels where the price has often reversed in the past. These can be horizontal lines, trend lines, or other price patterns.
2. Monitoring volume:
As the price approaches a support or resistance level, traders watch the trading volume. High volume at a breakout confirms the strength of the move.
3. Entering a position:
After a breakout of a level, the trader enters a position in the direction of the breakout (buying on a breakout up, selling on a breakout down).
4. Risk management:
Stop-loss orders are set to limit losses and take-profit orders to secure profits.
Advantages of breakout trading:
Opportunity for quick profits:
In the case of a successful breakout, the price can quickly move in the new direction.
Simplicity of the strategy:
Based on understandable principles, making it accessible for beginner traders.
Use of indicators:
Traders can use various indicators to confirm breakouts and determine potential targets.
Disadvantages of breakout trading:
False breakouts:
The price may falsely break a level and return, which can lead to losses.
Need for precise level identification:
Choosing the right support and resistance levels is critically important for successful trading.
High risk:
False breakouts can lead to losses, so it's important to use stop-loss orders.
Example:
Suppose a stock was trading in a range from 100 to 110 rubles. The level of 110 is a resistance level. If the price breaks through level 110 and the trading volume increases, the trader can enter a buy position with a target, for example, of 120 rubles, setting a stop-loss at level 108. This will help limit losses in case of a false breakout.
