10 Rules For A Breakout Trading Strategy

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Breakouts can be signals based on price breaking and closing above a declining trend line, horizontal trend line, or a close above previous price range resistance.

Once a breakout is entered a stop loss can be placed at the low of the bar of the day of the breakout. If it is going to trend it should not undercut the low of the day of the breakout.

If the breakout trends in your favor you could move your initial stop loss from a close below the low of the day of the break to a trailing stop loss of a short term moving average like the 10 day exponential moving average. If the trend continues in your favor you can move up your trailing stop to the 5 day ema, a close below the previous day’s low, or a close back below the 70 RSI during parabolic trends.

Breakouts have a lower probability of success as a chart becomes more overbought as measured by the 70 RSI at the time of the breakout. A break and close above the 70 RSI can signal the beginning of a parabolic move.

Buying a breakout without understanding where key previous price resistance levels are at in the past on a chart is usually a bad idea as those trapped buyers could still be looking to get back to even by selling into the this strength.

Buying breakouts against the current market trend usually does not work. Buying them in the direction of the overall trend has better odds of success. Breakouts in bear markets usually fail, and breakouts very late in a bull market also tend to fail.

When you buy a breakout and it fails and falls back through the lows of the previous day, it is time to get out. If the lows of the breakout day are held, there is a good chance of a new range and a new trend.

Buying on the anticipation of a breakout before it actually happens is usually a bad idea. You should look for a confirmed breakout for better odds of success even if it leads to higher prices. Better to be late and right than early and wrong.

Chasing a break out after a multiple day move is not a good plan. You need a profit cushion to enable a longer term hold and the biggest part of the move can happen in the first few days of a breakout.

Buying breakouts in commodities and high growth stocks has a much better probability of success than in big cap stocks or indexes.

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