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Trading Breakouts: Putting The Odds In Your Favor

Date: Tuesday, January 17, 2017 1:19 PM EDT

You always hear traders talk about taking trades that have high probabilities and when I was first starting out I had a hard time finding a high probability set up that worked with my trading style and personality. That is until I discovered breakouts and the power of buying into momentum. You will never find a perfect setup that works 100% of the time but if you can find a setup that will provide consistent returns then you have found your trading edge.

 

 

In this trade example we are looking at a breakout in Facebook (FB) on January 4th, 2017  that ended up working great and never had us down money in the trade. Looking at the 5-minute chart of $FB above you will notice the trend has held the 20-day moving average (teal line) for the entire morning with small pull backs to test it and then would move on to higher prices. Shares found some resistance at the $118.20 level as it tested it twice only to be rejected, but on the third try it broke through and blasted off with well over a point in profit potential.

 

Anatomy Of A Breakout

When looking for potential breakout trades, you need to look for clear support and resistance levels. Levels that have been tested multiple times only to be rejected. When levels like this form on the chart you can bet that other traders are using that level to place their stops against to protect their positions in case it breaks through, which will increase the buying/selling pressure if it does and this is exactly what we are looking for.

When prices do break through you will want to see a pickup in volume and the tape should also speed up confirming the importance of the level and the likelihood that prices are going to continue through. If you don’t see this happen then you may be getting in at a bad spot and should look to exit at any sign of weakness.

 

How To Trade Breakouts

There are a lot of different ways to trade breakouts, but one way that I have found to work great is to place stop orders above/below the clear resistance/support levels. In the FB trade above there was clear resistance at $118.20 with a little spike above to $118.25 that got smacked down quickly. I placed a buy stop order just above at $118.26 and was filled on the push through.

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