How to trade breakouts

I would like to address a question that was sent to Javid recently on how to trade breakouts.

Breakouts are probably the simplest of methods to enter - but one of the most difficult to search for with high probability.

Many breakouts will turn out to be fake breakouts.

Even worse, many of those fake breakouts turn out to be tree-shaking.
Then, after the tree-shaking, price eventually moves in the direction of the breakout.

After we started trend trading (following the rules we had learnt from one of the Turtle Traders) we found the method so very simple to apply - and almost every trade we took during 2003-2005 turned into profit.

However, that was only part of the formula.

The reason for the success was not just the breakout components, it was also the timing of the trades.

The timing was based on the phase of the market - and at the time we were in a speeding driver.

Breakouts can be used in a speeding or sensible driver phase so they are universal and versatile - unlike pullbacks which are most suitable during sensible drivers.

Some guidelines to use for breakouts are listed below to help you if you are looking at entering breakouts at this moment in time.

• Look for a price squeeze, then breakout of a minor or major base

• Volume decline during the base formation

• Ideally, we want a big volume bar before the breakout or during the breakout

• Entry and initial compounds should be within 5% of breakout point (then after a new base)

• Stop is 5%-10% away

• You can exit (or reduce the position) beforehand if the trade is showing signs of failing (e.g. heavy volume on bearish days or support breach)

• Target is at least 20%. You can take some profit off here

• Trail with ATR - or you can use your preferred technical management tool

The above guidelines can be applied as is - or you can add to it to meet your own criteria or style.

Let's go trade!