Breakout trading

A level forms when price turns at the same area several times. Orders collect around it: stops of traders positioned inside the range and entry orders of those waiting for a break. When price moves through the level, those orders are filled and can push it further.

A breakout trader buys a break above resistance or sells a break below support. The levels come from support and resistance, from ranges such as the rectangle pattern and from formations such as the ascending triangle or the bull flag.

A fakeout, or false breakout, is a move beyond the level that does not hold. Price trades through, triggers the orders there and returns inside the range.

• Breakout – the candle closes beyond the level, the next candles stay beyond it, and volume is above average.
• Fakeout – price crosses the level with a wick or one candle, then closes back inside.
• A fakeout that takes the stops above a high and reverses is what smart money traders call a liquidity sweep.
• The two cannot be told apart in the first seconds. Confirmation costs part of the move, and that is the price of filtering fakeouts.

• Close – wait for the candle to close beyond the level on the chart you trade.
• Volume – a break on rising volume is given more weight than a quiet one.
• Build-up – several candles pressing against the level before the break are read as pressure. A break from the middle of the range is weaker.
• Trend – a break in the direction of the higher-timeframe trend is treated as more reliable.
• Range of the candle – compare it with ATR. A candle already several times larger than normal leaves little room to enter.

• Entry on the close – enter when the breakout candle closes beyond the level. This catches moves that never come back, at a worse price.
• Entry on the retest – wait for price to return to the level and hold. The price is better, but some breakouts leave without a retest.
• Stop – back inside the range: beyond the breakout candle or beyond the retest low.
• Target – the height of the range projected from the level, known as a measured move, or the next level on a higher timeframe.
• Size – set it from the stop distance so the loss is fixed. Check the risk-reward ratio first.

After a break, price often returns to the level from the other side. Broken resistance is then tested as support, and broken support as resistance. Traders who missed the break use the retest as their entry.

A clean retest touches the level, shows a rejection candle such as a hammer, and moves on. If price closes back deep inside the range, the breakout is treated as failed.

• Entering on a wick before the candle closes.
• Buying a breakout far from the level after a long candle, with the stop too wide.
• Placing the stop exactly at the level, where a normal retest reaches it.
• Trading every break of a minor level on a low timeframe.
• Ignoring the session: breaks in quiet hours fail more often than those in active ones.
• Holding a failed breakout in the hope that it resumes.