BREAKOUT STRATEGY
Overview about breakout
Breakout is when the price breakthrough a support or resistance level which leads to huge price
movement.
How to find breakout setups?
1. Do not get obsessed with chart pattern.
2. Instead, when price is consolidating, draw key levels.
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3. Wait for the breakout at key levels. DO NOT TRADE DURING CONSOLIDATION!!!
4. Beware of false breakout:
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5. When price breakout, it should not be viewed as a trend. 80% of the breakout are false breakout!
6. How to avoid false breakout?
Look for momentum candles
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Action?
Buy at the momentum candle close price, and set stop loss at slightly below trendline.
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Make money if scenario 1 and 2 happen, and capped loss when scenario 3 happens.
TP : A true breakout will usually gain a strong momentum. Close half of the position at 3 times of the
stop loss, and move stop loss to breakeven point and let the remaining half run until 8 and 14 moving
average cross over.
Example for down breakout
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Enter trade at the close price of the last red candle, and set stop loss slightly above the support line. Set
half of the position at RRR 1:3 , and the over half when the 8 and 14 MA cross over
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More on false breakout
Why?
1. Market manipulation by smart money to trick the retail trader for liquidity sweep.
2. The previous trend losing its momentum and did not continue after the initial breakout.
Doji
Be careful of the smaller candlesticks with long wicks when approaching the zone. This could indicate
the end of a trend. The Doji is an indication for a reversal.
Another example of false breakout:
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Most retail traders are impatient to wait for more confirmation and immediately enter trade when the
first green candlestick breaks the zone, but shortly after that the price reversed!
Need to wait for more confirmation before knowing if the breakout is true or false.
Based on the above example, there are 2 big red candlesticks after the false breakout, indicate that
there is a strong sell pressure to press the price down. Should enter a sell trade rather than a buy trade.
Another example
Big red candlestick! Breakout??!! May or may not be. But merely based on one candlestick is risky,
better wait for one or two more candlesticks.
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Opps! False breakout again, there is a large bullish engulfing candlestick to suggest the trend is going
up soon! Entering a sell trade at the false breakout point is going to make a loss.
As it is now confirmed as a false breakout, then can enter a buy trade as the trend is going to reverse:
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True breakout
Bullish
engulfing
Price had been on an uptrend and broke the key level, but created a false breakout. However, there is
not reversal, but instead, the price starts to consolidate.
Draw a channel for the consolidation and to see of the price eventually breaks the channel, either up or
down. In this case, there is a bullish engulfing, and the next candlestick is also a green, this should be
a true breakout because the price is now above the key level and broke the consolidation channel.
Momentum candlesticks is a good indicator for the start of a trend.
Can enter a buy trade.
Another example
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Price broke the key level but entered into consolidation. Then a large green candlestick broke the
channel and that should be the beginning of the continuation uptrend.
A retest can also be an indicator for trend continuation because the retest did not break the zone for a
price reversal.
Another example
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Price did not bother to retest the level nor consolidating. The trend is very strong. What should you do?
1. Enter trade after the trend is confirmed by multiple confluences, or
2. Do not take this trade and wait for the next opportunity. The reason is because you have been
waiting for a retest but it did not happen, and you are now too late to enter a buy trade, the RRR may
not worth the risks. Just let it go and look for the next opportunity.
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