If you find yourself in a position, where you enter a trade, but it immediately goes
in the opposite direction, before finally going in your favor? Well, then this video
will make you better at trading. Lets look at a theory, Lets say, you saw some strong
support and resistance areas, and you are waiting for the price to break those levels.
You put your money in a position when the price gives a break out. The price is breaking
out of a resistance level. But instead of moving further in your direction, it turns
around as soon as you enter the trade, and hits your stoploss.
To understand why price goes against you after a breakout, we will first have to understand
what actually happens inside a range breakout. Since price ranges after a trend, let's assume
that some traders took long positions in an uptrend. After a while, the price gave a
pullback near a support level after touching a resistance area, but then struggled to
make a higher high. After getting buying and selling pressure at the support and resistance
levels, the price simply moves sideways. Any beginner trader can tell, that this is a
range market, and price will make a big move after it breaks these support and resistance
levels.
But here's the thing. Some traders who bought when the price was trending, or traders who bought
at this pullback, will still have an open position. In a range market, price can either
break up, or break down. In this example, since price hasn't given any signs of reversal,
traders who are holding a long position, will set a stoploss just below the breakout support.
Then there are second kind of traders. These traders are willing to sell at a resistance
level, hence the selling pressure that is stopping the price to go higher. The traders
who are selling at this resistance level, will most likely set their stoplosses, just
above the resistance level.
Now here's a big problem. In these kinds of scenarios, the stoploss of a retail trader
becomes obvious and vulnerable. In a breakout, the people who are selling at resistance,
are setting their stoploss just above the resistance. And the people who are buying
at the support, are setting their stoploss just below the support level.
Now lets say, there is bill. Bill, is the big banks. Bill is the one who trades in very
large quantities. Bill the big banks, sees the breakout opportunity. He sees that there
are many stoploss orders waiting to be triggered. Now remember, big banks actually trade in
very high quantities than the retail traders. So when an institutional trader enters with
a very big position, the price makes a big move, especially on smaller timeframes.
In this scenario, when the price comes near the support. Bill the big banks, creates
a selling pressure that leads to a small downward move. But since there were a lot of retail traders waiting
for a breakout, 2 things happen. Number 1, the people who had their stoploss orders just
below the support level are taken out. Since a stoploss order in a long position, is a
sell order, more selling pressure is created at a breakout.
Number 2, the people who wanted to sell at the breakout, finally sell, and create even
more selling pressure. These traders will set their stoploss just above the breakout
level. The selling pressure leads to a big red candle.
Now, what do you think will happen, if the big banks creates a buying pressure as soon
as the breakout happens? When this happens, the traders who entered after the breakout
candle, are taken out because they had a stoploss, just above the breakout level. Since stoploss
order of a short position is a buy order, a new buying pressure is created. And if
the top resistance is crossed, even more buying pressure is created as the traders, who had
a stoploss above the resistance, are taken out, and new orders are created at the new
high. The retail traders who had open orders below the support levels, basically got played.
Beginner traders who get to experience this part of the market, sometimes complain that
their broker can see their open orders, and is trading against them. No, that's not really
the case. Your orders are simply too predictable.
So how can you avoid this from happening? Well, the easiest and effective way of trading
a breakout, without getting played, is to wait for the price to react in your favor.
There is a chance that price will reverse after a breakout, but we cannot know that
as a retail trader. If a breakout is going to work, In a downward breakout, the level
that is broken will now act as a resistance level. So, it is better to take the short
position, when the price comes back to this resistance area, and struggles to go higher.
Then you can look for an entry signal, like a engulfing candlestick pattern.
Now some traders will say, why not just put stoploss orders far away from the obvious
support and resistance levels? Well, if you do that, you will not get a decent reward
to risk ratio.
What about trend breakouts? If a down trend that was respecting the trend line resistance,
suddenly breaks out, will the price reverse? No, unless the down trend was a weak pullback
of an uptrend, or if it is at a strong support level, a simple trend line breakout will
have a low chance of reversing the price direction completely. You see, when the price breaks
the trend line support or resistance, it doesn't always has to mean that price will
take a 180 degree turn. It can simply mean that the trend is getting weaker, and can
go side ways.
Now imagine a second scenario. What do you think will happen, when price breaks out
of an all time high resistance level, and makes a new high for the first time in its
history? It will be on the news. Many people who have never traded in their entire life,
will take long positions in that asset. But what if price doesn't go further up? What
do you think will happen then? Well, first of all. The people who took trades only looking
at the news, will panic. When the price comes back below the previously broken resistance
level, many will cut their losses. This will create a huge selling pressure. and since
this is a panic sell, you can capture a good profit when the price makes a big move down.
A lot of beginner traders are told to trade the trend breakouts, without completely explaining
what kinds of breakouts are better. The trend breakouts that have a higher chance of working,
are probably the pullback trend breakouts. In a strong uptrend, if the price gives a
small pullback, you can trade the break out of that pullback. This way, you will take
trade in the direction of the long term trend, which will increase your chances of making
a profit.
Now lets imagine another scenario. This time, when the range is formed after an uptrend, there is
no Bill the big banks, or any bank to take trades against you.
Let's say, someone draws the support and resistance levels, at the tails and body of the candles.
When they take positions at the breakout, the price goes in the opposite direction again.
But this time, it's because the beginner trader is too much focused on their favorite timeframe.
You have to understand that not everyone is looking at the exact chart as you are. The
support and resistance you draw using tails and bodies of the candles, won't always work,
because they will look very different on different timeframes.
If you are waiting for a breakout to happen, make sure the support and resistance you are
looking at, can be easily identified on other timeframes. Furthermore, when the breakout
happens, make sure it is visible on different timeframes as well. Because sometimes, a successful
breakout on one timeframe, can mean something else on other timeframes. This can lead to
a lack of high volume and interest near the breakout area.
After understanding these kinds of scenarios, you will be able to tell when a possible trap
is set, and with patience and good money management, you will probably make money with
the breakouts.
That's all. Now you know a little more about breakouts in trading. Like the video if you
liked it. Subscribe for more trading videos, and check out other videos on the Trading
Rush channel, where we tested many different trading strategies 100 times to find their
real win rates. Thank you very much for watching.