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minimize loss.
Breakouts in price make for powerful moves and can offer a significant risk to reward ratio. A breakout trade occurs when the price of an asset moves above or below the trading range. The trading range, also known as a channel, consists of highs and lows that closely resemble a sideways trend on a candlestick chart.
Terms you should know.
Here are basic terms that you will want to familiarize yourself with when starting in breakout trading:
Sideways market - A sideways market is when prices within an asset remain flatlined between support and resistance. Creating a channel where buyers/sellers trade back and forth between these two price levels.
Breakout - A breakout occurs when price action breaks above a resistance area or below a support area.
Price Action - How price moves up and down on a chart. This includes trends, trading ranges, and sideways markets.
Breakout Trading - Once prices break through the support/resistance area, it will then trade outside of this range creating a new trading channel. This is what breakout traders watch for to spot potential profit opportunities.
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When breakouts occur.
Most breakout trades occur as either long or short breakouts. A long breakout begins as the asset's price moves below the channel's lower boundary and then closes at least 50% above that boundary after one month, while more experienced traders aim for two months. Some traders recommend waiting three months to avoid catching false breakouts where prices return to the mean before breaking out again.
False breakouts include whipsaws, temporary price spikes that squeeze traders into selling or buying before the trend returns to the mean.
A breakout is often accompanied by increased volume and increased volatility. Breakout trading can be implemented in day trading or swing trading.
When traders watch for potential profit opportunities on a chart, they typically watch for a price action break above or below a support or resistance area. When this occurs, it represents a break in the current trend, allowing traders to profit from a potential change in that trend. This strategy is known as breakout trading or breakout entries.
Breakout trading can be applied to any market or asset, but they are most effective for assets with large ranges with plenty of volatility and liquidity. To get the best use of this strategy, the trader must know the right time to enter into a new trade.