Breakout Trading Strategies
Trading breakouts is not a new concept; traders have been using breakouts for centuriesToday many of the world’s top traders trade breakouts for big prots. So what actually is a breakout?
A breakout is the point at which the market price breaks away, or moves out of a trading range. The trading range can be for any length of time but once prices exceeds the high or low of the range, a breakout has occurred.
The accepted market wisdom is “buy low sell high” and this has been taught to us in high school and is the accepted philosophy of many of the world’s investment community, from economists to brokerage houses. The theory sounds ne, but it is very difcult to make money trading this way. The logic of breakouts is
contradictory to this accepted market wisdom and works on the premise: That in order to make money you should “buy high and sell higher” in a bull market, and “sell low buy back lower” in a bear market.
So why is the traditional investment wisdom of “buy low sell high” so difcult to make money in the real world of trading? For this we need to take a closer look at price action and the attitude of the majority of investors.
Why Breakouts Increase Protability & Decrease Your Risk
Perhaps the most famous traders in the history of trading were the “Turtles”. The turtles emerged from a meeting between Richard Dennis and Bill Eckhardt about whether great traders were born or made. Bill felt that he could teach people to become successful traders. Richard felt that successful trading was down to genetics. In order to settle the debate, it was decided to advertise for
trading apprentices and then try and teach them to become successful traders. The
students were called the “Turtles” when Dennis explained the concept by saying they were “going to grow traders like they do turtles in Singapore” They were the most successful trading experiment in history, earning an average compound rate of return of over 80%. It was proved that with a simple set of rules complete novices, with no experience, could become successful traders. The rules used were simple and included the use of breakouts in the methodology taught. While only one component of the
overall plan, the breakout methodology was very important part of how the traders actually got into and held the big trends for maximum prot.
In the book “Market Wizards”, there is a very good interview with Bill Eckhardt and his analysis on what made the Turtles so successful. He illustrates the point further that traders, in their desire to “buy low sell high”, create risk for themselves. By doing what is conventional and comfortable for them actually means they end up missing the biggest trends, and creating a greater risk for themselves, by lowering their probability of entering at the right time and making an overall prot.
Breakouts Make Your Money Work Harder
Another important reason for using breakouts, rather than buying low or retracements,
is that trading capital is utilised better. It is the aim of all traders to lock into and hold trends. The fact is, however, that markets spend most of their time in trading ranges going nowhere. Many markets don’t trend for months or even years. A trader who takes a trade in the anticipation that it will move, may have to wait a long time to see the trade move his way, if it does at all. This can tie up capital for long periods that could be utilised more productively elsewhere. The big advantage of breakout trading is you are only entering a trend in motion. As we all know, a trend in motion is more likely to continue than reverse. This is a basic premise that technical analysis is based upon, and
breakouts get you in, as the trend emerges, and has a high probability of continuing. You therefore know you are only entering markets that have a high probability of trending strongly and making you big prots.
Breakout Forex strategies