Breakout strategy has been successfully used for years and still is. It is based on a fundamental principle: In fact, any level is eventually broken, this is a thing we know for sure. For example if you draw two lines: The market can turn and stay inside those lines for a while but in the end when the market starts to trend, that level is left for a long period of time.
Breakout means trend following and Richard Donchian can be considered the father of this strategy. His work was continued by Richard Dennis who realized the importance on money management in trading breakouts. Right entries and right money management are the key to success if you want to trade using this strategy.
But one thing is sure: Basically, trading breakouts involves buying at the top and selling at the bottom in spite of our common sense that tells us the opposite.
A successful breakout strategy must meet the following criteria:. Tight stop loss and large take profit. When those lines are broken, the profit we make must cover the previous losses plus some profit. The signal has to be strong enough in order to filter false breakouts. If the price stabilized above the support line, that line becomes resistance lines. If the price stabilized above resistance line, the previous resistance line becomes the actual support line.
Breakout retracements can also be traded with great success. Wait until the price retraces near the current support line from above, then buy, or sell if the price retraces near current resistance line from bellow. Build the upper and down lines according to the following rules: If higher high of N bars is broken from bellow then buy. If lower low of N bars is broken from above, then sell.
If the volatility is very very low, it means that a violent move will soon follow. It means that high impact news are expected and until then there is no clear trend. Wait until that violent move occurs than trade in its direction. Of course there are many ways to trade breakouts, I just wanted you to have a basic idea of what breakout is.
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