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Breakout or Fakeout?
http://www.financial-spread-betting.com/strategies/trading-breakouts.html PLEASE LIKE AND SHARE THIS VIDEO SO WE CAN DO MORE! In this lesson, we look at the various aspects to trading a breakout. A breakout is when a price has been banging away at a support or resistance for a while, establishing the level, but then passes through the level and continues on its way.
It’s obviously great if we can spot this, because we can place a trade to take advantage of the price continuing away from the breakout level. This is one of the fundamental ways to make a trade for profit.
The question is how to determine whether this is a real breakout that will carry on, or if this is a “fake out” which looks as though is going to run away and then returns back behind the support or resistance line. What’s really happening is we need to determine when we’re going to take the trade, when is a good time with a high probability and a minimal loss if it doesn’t go our way.
As mentioned in the support and resistance lesson, once a support or resistance is broken quite often the price will come back and test it from the other side, and the level becomes the opposite, i.e. support becomes a resistance and a resistance becomes a support.
If you choose to place a trade when the price has broken through by a certain distance, you risk it coming back to the support/resistance level and maybe even failing to sustain the breakout. One way to avoid a possible greater loss is to place a conditional trade, a limit order, which will only open the trade once the price does come back to the area of the support/resistance level. When setting the level you must always remember that you cannot rely 100 percent on the actual level, and you have to leave a margin or fudge factor to make sure you actually capture the trade.
You should also have set a stop loss order to terminate your trade if the breakout fails and the price comes back through the support/resistance level.
What have we achieved here? First, if the breakout continues without coming back to the support/resistance level, we do not even enter the trade – nothing lost, nothing gained. If, as we suspect and hope, the price comes back to the support/resistance level but then reverses and continues the breakout, the limit order will enter the trade at the best possible price and produce more profit. If the breakout fails and the price comes back through the support/resistance level, then we have reduced the amount of loss before the stop loss level is hit and the trade is ended.
On the whole, this strategy appears to be advantageous. If the breakout works or if it fails, we maximize profit or minimize loss, respectively. So trading like this can be a good tactic. The circumstance that this ignores is if the breakout happens and the price continues without coming back to retest the level. In this case, we never enter a trade so it’s a missed opportunity.
Trading is not exact, and is different every time you do it. On balance, you may think it’s worth missing some chances for the sake of improving your results when the trade happens.
Related Videos (these are just of the videos we created on breakouts - for more just use the search function on this channel!)
Trading Breakouts: Which Breakouts are Likely to Work Out Best? ✔️👍
https://www.youtube.com/watch?v=GZGtU9475sQTrading Breakouts: 5 Situations Where You Shouldn't be Buying a Breakout
https://www.youtube.com/watch?v=i8Q2GO-NewUA Simple Breakout Trading Rule: Longer Price Stays in a Range = Bigger Breakout 🔥
https://www.youtube.com/watch?v=YdY6sNyQou4Tips for Identifying Real Breakouts! 🙂
https://www.youtube.com/watch?v=bPnS9asAp_ISpotting the Difference between a Pullback and a Reversal? 📈📉
https://www.youtube.com/watch?v=n1sEYUT8vu4How to Trade Breakouts: A Simple Strategy 💡
https://www.youtube.com/watch?v=DnOZW-7QYd4Using False Breakouts to Your Advantage in Day Trading: How to React to False Breakouts 📈
https://www.youtube.com/watch?v=b1xr0i-XEOwBreakout Trading Strategy: Exiting a Breakout Trade within a Trend 👊
https://www.youtube.com/watch?v=UHdDmwiig2sClassic Breakout Strategy with a Twist! 🎩
https://www.youtube.com/watch?v=zxiVIXjQ5IsTrading a Forex Breakout if you've Missed the Move 😑👍
https://www.youtube.com/watch?v=OOpOLZKi93cTrading Strategies that Profit from Trapped Traders: How To Trade Against the Losing Traders 🔥
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