Understanding the Breakout Trading Strategy: A Comprehensive Guide

Breakout trading is an excellent strategy for intraday traders. It allows investors to benefit from breakouts in the market. However, intraday traders must be quick in entering and exiting market positions. A delay in intraday trading might lead to potential losses. Many beginners in the stock market try to earn returns on short-term price movements without knowing the right strategies. As a result, they often end up in a loss due to intraday trading. Read on to understand what breakout trading is for intraday traders.

What is Breakout Trading?

You must know what support and resistance levels are to understand breakout trading. The support level is the price level of an asset at which it stops falling. The price of an asset might even rise after hitting the support level. On the other hand, resistance level is the price at which the asset stops showing upward momentum trading . The price of an asset might start falling after reaching the resistance level due to increased selling pressure.

When prices move below the support level or go beyond the resistance level, it is called a breakout. When the asset’s price moves outside the support and resistance levels, traders can implement the breakout strategy. Traders usually enter the market when the breakout is about to happen. However, they must quickly enter and exit the market to earn returns. Also, breakout traders must identify when the prices break free from support and resistance levels.

How to Read the Breakout Indicator?

Now that you understand the meaning of breakout trading, let us discuss how to read the breakout indicator. You can view an asset’s price chart over a period to identify the breakout point. You can use moving averages to determine the breakout point. You can see a candlestick pattern representing previous highs and lows for an asset. When the next candle breaks the previous low or high, it might represent a breakout. You can also use the resistance and support levels to determine the breakout point and take market positions accordingly. Reading the breakout indicator might be challenging for beginners in the market. However, it will become easy once you understand the price chart and its technicalities.

Key Tips for Intraday Breakout Trading

Investors indulging in breakout trading must first identify the support and resistance levels. Using moving averages and other technical analysis tools to identify support and resistance levels on a price chart. Since a breakout happens when prices move outside the support and resistance levels, you must mark them first. Intraday traders must also know how to use scripts. Scripts are automated instructions to enter and exit market positions. You might fail to place orders in quick succession during a breakout manually.

Investors must also wait for confirmation when prices break support or resistance levels. Although it is implemented when prices break support or resistance levels, false breakouts are likely. You can check the trading volume to confirm a breakout before using scripts. A higher trading volume usually confirms a breakout in the market. Intraday traders must also know the risks and implement effective strategies to minimise potential losses.

Unlock Stock Market Opportunities with Religare Broking

Advantages of Intraday Breakout Trading Strategy

Intraday traders interested in momentum trading can benefit from the breakout trading strategy. Once you confirm a breakout in the market, you already know what will happen. You can enter positions and make investments knowing the momentum is on your side. Since this type of trading is usually automated with the help of scripts, it removes the chances of human errors. You will hardly miss buying or selling the asset at the right price with the help of scripts. However, some risks are still present for intraday traders. For instance, a false breakout might lead to potential losses, considering the investor did not confirm the breakout.

Steps to Employ the Breakout Trading Strategy

You must know the right sequence of steps to implement the right strategies. The first step is to mark the price level on the breakout indicator. You must identify support and resistance levels for a particular asset in its price chart. Once you identify the support and resistance levels, it is ideal to wait for a breakout. When prices go beyond the resistance level or dip below the support level, you are ready to make an entry into the market.

You will need a breakout candle to close your trade above the resistance level. Closing or exiting above the resistance level in breakout trading is essential. Alternatively, you can choose to close below the support level to earn returns. However, don’t forget to confirm a breakout before implementing these steps, as there might be a case of a false breakout. Besides a breakout, you can check for the Volume-Weighted Moving Average to show an upward trend. Once you are confirmed, buy scripts and implement the strategy.

Three Instances When You Should Avoid Employing the Breakout Strategy

The strategy might not work effectively in all market conditions. Here are some instances where the breakout trading strategy might fail:

  • It is not effective in a market far from support and resistance levels. A breakout might not occur easily in such a market.

  • It cannot be implemented without confirming a tight trading range. A tight trading range is a scenario where the asset trades within a narrow price range. Also, the tight trading range must be visible before a breakout to implement the strategy.

  • Do not implement it when the breakout is set against outside pressure. A force outside the market might push prices in the opposite direction. Using the breakout trading strategy is essential only when natural breakouts occur in the market.

In a Nutshell

The breakout trading strategy can help investors benefit from breakouts in the market. You can earn returns when the prices move outside support and resistance levels. However, intraday traders must confirm a breakout in the market before implementing the strategy. False breakouts in the market might lead to disastrous decisions. You can use the trading volume, moving averages , and other factors to confirm a breakout in the market. Start checking for a breakout in the market now!

Open a Demat & Trading Account