Breakout Trading Mastery: Techniques to Assess and Exploit Market Movements

Master Breakout Trading: Techniques for Spotting Opportunities

Trading breakouts consist of exploiting opportunities at levels where the price shows weaknesses and can not hold the level, so the price breaks through it and stays following a directional move, typically with strong momentum.

Something interesting about breakouts is that the big players in the market use them for manipulation techniques, as these levels represent zones of clustered orders.

Institutional traders use those zones to move the price falsely in a direction to trap other traders in a false breakout, inducing them to close their positions in loss, injecting money into the market, and feeding the interests of these traders.

Recognizing false breakouts and effective breakouts is crucial to exploiting them. Traders can use techniques like combining indicators, identifying order blocks, and analyzing the candle size to spot weaknesses or strengths, either in false or effective breakouts.

Let's discuss these techniques in the following sections.

Types of Breakouts

Before diving into techniques, it is important to point out the types of breakouts possible in the markets, such as:

• Trendline Breakouts: This means a reversion movement is likely to start.

• Range Breakouts: This may occur at the range top or bottom sides, and it means the price will continue in a prevailing direction or reverse after a consolidation phase.

• Chart Patterns Breakouts: Patterns like flags and pennants can be spotted with the two previous breakout types. This means that in trending markets, the price will consolidate at some levels where flag and pennant formations typically emerge, and they can be connected by trendlines and with a horizontal line at both points where the price could break through.

Indicators In Breakouts

Traders can measure the momentum during a breakout with indicators such as the Relative Strength Index (RSI), MACD, and Volumen. For example:

• RSI can offer insights into the strength of the price, indicating overbought or oversold conditions and divergences. For instance, a price movement coming out from a divergence and heading towards a support or resistance may be more likely to break the area.

• MACD follows and gauges the market momentum. For instance, the price movements after crossovers can be more likely to break through a price zone.

• Volume quantifies the number of orders transacted in a period. The higher the volume, the greater the chances that a price movement will maintain its trajectory.

Source: Breakout Trading Strategy: Measuring Breakout Strength - Altrady!

Identifying Order Blocks

This technique can help traders identify zones of strong supply and demand. In this case, the price is unlikely to break through the order blocks, but rather bounce off.

However, institutional traders may use these levels for manipulation techniques. The price could break for a moment as institutions increase their position size but in the end, they exit their positions to trap other traders, provoking a contrary move influenced by the aggregated orders.

Source: Breakout Trading Strategy: Identifying Breakouts!

Analyzing Candle Size

Concerning order blocks the size of the candle can suggest if a breakout is likely to be false or effective.

Big candles suggest stronger movements, and smaller candles indicate a lack of strength

Also, by using the volume indicator, traders correlate the candle sizes with the amount of volume. High volumes are typically followed by big candles.

Conclusion

Understanding breakouts means understanding that markets are affected by the forces of supply and demand. The levels where these forces are poor will show signs of weakness until the price finally ends passing through them.

Volumen, order blocks, and candle sizes can spot signs of potential breakouts and those that can be false. Start trading breakouts in Altrady and implementing all of those techniques by enrolling in free trial account.