Trading breakouts can prove to be extremely fruitful. As we all know a breakout occurs when the underlying price of a commodity or forex pair breaks its support or resistance levels. Such a scenario can occur during any market condition and thus several traders focus only on them and earn good profits. Here are some tips for trading breakouts.
A successful breakout is characterized by volatility which differs from session to session. At a time when there is high volatility, it means more players are there in the market and the probability of breakout is high. So the time at which you make your breakout trade will play a key role in determining its success.
In ideal situations breakout trades are taken in the initial three hours of the London session, half an hour before New York opens up to 30 minutes before the close of the London session. Apart from these timings, the possibility for a successful breakout trade is low because volatility is low or in a declining phase and may not be supported by adequate orders to breach the key levels. Another useful tip is that one should avoid taking breakout trades at a time when some major economic announcement is expected or major holidays are going to start.
The timing of your breakout trade can also be decided by using options data. High option trades at a particular price indicate chances of greater volatility while a lower figure is indicative of a range bound trade. When you are planning to take a breakout trade, you need to check its volatility percentile figure and a level of 70% or more should be preferred.
Another useful tip is to identify the warning signals that appear in the form of price action and order flow ahead of a breakout. The longer the level of compression in the price action prior to breakout, the better it is for your trade. This is important because longer compression means increased pressure which has to be released in the form of a breakout.
A successful breakout trade is dependent on your ability to spot the various clues and follow these tips. Apart from this you also need to define your risk upfront by using stops and deciding a sale point. The overall trend of the market should also be considered for successful breakout trading.