There are several methods for trading a breakout, but I have a favourite.
I bring this up only because it is the exact strategy that I have discussed using for the EUR/USD when it broke out - which it did on Wednesday, March 24 2010.
If you have read my daily EUR/USD analysis, I talk about waiting for a pullback and then a renewed push, or what I sometimes call a "confirmed breakout.
" While this is an example of the trade strategy, the strategy can used in any market, on anytime frame and on any breakout trade.
Most people pile in when something "breaks" a major level, but then there is a pause or a bit of a pullback and traders panic thinking the breakout was false.
These are normally novices and their greed to be first one in and save every pip before it really starts to move normally means they get shaken out before the "real" move ever occurs.
Take the EUR/USD for example, and the breakout on Wednesday.
I had the low of the range pegged at 1.
3430.
The initial breakout took the pair down to about 1.
3410 but then pulled backed to 1.
3440 - inside the former support.
This is where I get interested.
A first group of traders are getting out of their breakout trades because they feel nervous that it is another false breakout.
But it is right at this time that predators are about to pounce.
In the case of the EUR wednesday, as soon as it showed renewed signs of weakness it got pounded lower - right at that point where it turned back lower is when we get on board.
Waiting for that pullback can save a lot of money, because far few false breakouts are traded.
The trade is only taken if the pair (or stock or whatever) moves back in the breakout direction after pulling back to the breakout point.
Minor penetration of the breakout point is fine, but too much and it warrants caution.
Entries can be taken when the market makes a new high/low or at the midpoint between the breakout point and the high/low.
I reiterate, this is AFTER the initial break occurred - we sit back and wait.
The object is to get in the breakout trade after the initial wave of traders have already panic-ed out.
Because of the pullback and our entering when the pair moves back in the breakout direction gives us a very small stop on a potentially very big trade.
There is one obvious problem with this strategy.
It is safer, which means that occasionally trades will be missed because the market does not pullback enough to provide a valid entry or moves to far to quick to keep risk and reward in alignment.
This does happen, but often there is some sort of pullback after the breakout.
If we wait for that, and then a renewed push in the breakout direction after the pullback, we can feel more confident that the breakout is legitimate.
Pull up your charts to see what I am talking about.
The longer term range low was about 1.
3430 and when the rate dropped below, we did nothing.
We wait, then a pullback occurs, and when price moves back lower again we pounce on the short.
The concept is the same for an upward breakout or a downward breakout.
I bring this up only because it is the exact strategy that I have discussed using for the EUR/USD when it broke out - which it did on Wednesday, March 24 2010.
If you have read my daily EUR/USD analysis, I talk about waiting for a pullback and then a renewed push, or what I sometimes call a "confirmed breakout.
" While this is an example of the trade strategy, the strategy can used in any market, on anytime frame and on any breakout trade.
Most people pile in when something "breaks" a major level, but then there is a pause or a bit of a pullback and traders panic thinking the breakout was false.
These are normally novices and their greed to be first one in and save every pip before it really starts to move normally means they get shaken out before the "real" move ever occurs.
Take the EUR/USD for example, and the breakout on Wednesday.
I had the low of the range pegged at 1.
3430.
The initial breakout took the pair down to about 1.
3410 but then pulled backed to 1.
3440 - inside the former support.
This is where I get interested.
A first group of traders are getting out of their breakout trades because they feel nervous that it is another false breakout.
But it is right at this time that predators are about to pounce.
In the case of the EUR wednesday, as soon as it showed renewed signs of weakness it got pounded lower - right at that point where it turned back lower is when we get on board.
Waiting for that pullback can save a lot of money, because far few false breakouts are traded.
The trade is only taken if the pair (or stock or whatever) moves back in the breakout direction after pulling back to the breakout point.
Minor penetration of the breakout point is fine, but too much and it warrants caution.
Entries can be taken when the market makes a new high/low or at the midpoint between the breakout point and the high/low.
I reiterate, this is AFTER the initial break occurred - we sit back and wait.
The object is to get in the breakout trade after the initial wave of traders have already panic-ed out.
Because of the pullback and our entering when the pair moves back in the breakout direction gives us a very small stop on a potentially very big trade.
There is one obvious problem with this strategy.
It is safer, which means that occasionally trades will be missed because the market does not pullback enough to provide a valid entry or moves to far to quick to keep risk and reward in alignment.
This does happen, but often there is some sort of pullback after the breakout.
If we wait for that, and then a renewed push in the breakout direction after the pullback, we can feel more confident that the breakout is legitimate.
Pull up your charts to see what I am talking about.
The longer term range low was about 1.
3430 and when the rate dropped below, we did nothing.
We wait, then a pullback occurs, and when price moves back lower again we pounce on the short.
The concept is the same for an upward breakout or a downward breakout.