In this video, the latest in our short series on trading strategies, I thought
we'd take a look at the idea of trading breakouts. Hello I'm David Jones from
Capital.com and I thought in this video we'd have a look, short video, on the
subject of trading breakouts. These can be powerful because they can signal the
start of the next major move in the market, regardless of the time frame
you're trading. But we can't just jump in in the direction of the break - I think we
need to give some thought where our stops go, in terms of managing risk and
that sort of thing. So before we talk about that let's just take a quick look
at what I mean by breakout. So we'll take a look at some some really good examples
from the short term, from the DAX; the German index, and also some longer term
examples on the pound-US dollar. So for our breakout example let's take a look
the DAX, so the German index. So we're looking at an hourly chart and you can
see September 10th trades up to what twelve-thousand-one-forty, sells off, moves up again September 12th twelve-thousand-forty and again later on the
same day it's twelve-thousand-forty. So that is clearly the level that we need
to watch for any potential breaker. Let's just move forward in time. So here's the
break, so this is an hourly chart so the market pushes through that level - it's
jumped really quickly - jumped about 40 points, thirty-five or forty points on the
level. So one way of trading this is we have an order in above waiting to buy or
we watch the breakout and see what happens next. So really you know if we
get a pullback it can be an opportunity to buy in but breakout suggests there
has been a change in sentiment. So about seven hours later the market does pull
back, so this can be the opportunity if we missed out on the break and we think
the market is going to be going to move higher - this can still be an opportunity
to get in on what we think could be the next move higher and as it turned out
the market did push higher following the break.
So if you move forward again you can see, following a break, we've got another
level that's proven to be a problem around about twelve-thousand-one-hundred-and-thirty
trades out to 8:30 in September, up to it again,
the next day the fourteenth and later that same day up to it again. So again
there's a couple of ways trading this: we can put our an order into by just
above twelve-one-thirty, or we wait to see what happens if the level breaks.
Let's jump forwards again. So again we get the move it breaks if we had an
order in to buy we would have been in the trade, otherwise we can wait for the
pullback, wait for the strength to come back, place a stop loss - maybe the other
side of these lows here - and wait to see if the market moves higher from
there. But even though this has been pretty volatile on the brakes it does
show that if we have you know a definite level that proved to be a problem, if we
get a move through it, it can be a suggestion that maybe the market is
starting some new trend. And just to wrap this up you can see on that last break
it did actually start a move that went on for about 200 points. Ok so it's not
necessary to jump in as soon as the level breaks but it can be a suggestion
that things are changing. The same applies of course to breaks to the
downside. Just to illustrate the principle the other way around, this is
pound-US dollar, this is a four-hour chart so we're looking [like] we've gone back a
little bit to the lows from March around about 137. The market rallies all the way
up to 144, so we saw a 700 point move off that level. It comes back down
again we're expecting the level to hold old support but it breaks and it broke
here and it did follow through, we got the odd rally to sell into, but you can see all
of these support levels that get formed on the way down, when it breaks, it can be
a suggestion that the next move lower is starting. So once again you don't
necessarily have to get on right as soon as the levels level breaks, either up or
down, but when we see a move we want to think about trading in the direction of
that move. So if we get, in this example here, where it breaks through old support
and squeezes back up and then fails - that can be our opportunity to sell short.
So hopefully those examples make it clear. What we're looking at is a
market that maybe keeps hitting highs, doesn't get through, and then suddenly
bang! We get the break. And the flip side is the market keeps bouncing off support,
but then, in the time frame we're watching breaks through the support.
An aggressive strategy is to jump on the move straight away but I think that can
give something of a problem when it comes to setting stop losses because
maybe you don't know where your stop-loss needs to go. Perhaps the more
disciplined, more patient, approach is to wait for the market to push through on
the breakout. Then come back and then resume in the direction of the break.
That way you can have a tighter stop and it's maybe a more managed [and] more
disciplined way of trading. Of course it does mean if a market really starts
running away you're gonna miss out if you were just trading off the break out.
But I think there are enough times, as we saw with those DAX examples, where the
market will break, come back and retest, and then move away. It's a really simple
strategy. It doesn't work all the time, which is why we need sensible risk
management such as stop losses, but it's a great way of identifying the potential
for a new trend starting, and getting in pretty near the beginning of that move
and having a sensible place the other side of the breakout for placing your
stop-loss. We'll start wrapping things up that for this short session on trading
strategies. As usual if you have any questions or a different view just leave
us a message in the comments down below. When it comes to our YouTube channel we
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there so from me, David Jones, and Capital.com, good luck with your trading!