In trading, is the breakthrough your entry point?
Yes, a breakout in a trade is my entry point.
There are fewer proponents and more opponents of breakout trading in the market, mainly because fake breakouts are often encountered in actual trading. After entering the position, the market does not rise but falls instead, leading to a stop loss. In fact, facing the uncertainty of the trend, all entry methods will encounter false signals, including pullback entries, which can also be stopped out and encounter fake pullbacks. These are inevitable.
We should objectively view the false signals of breakout entries, accept the possibility of stop losses, and also refine the details of breakout entries, and execute them properly to achieve profits.
Today, I will share several key points of breakout entries.
1: There are many types of breakout entries.
Breakout entry is a broad concept, and in practical combat, it still needs to be combined with specific technical standards for entry. The most important types of breakout entries are three categories.
(1) Breakout of consolidation patterns.
Breakout trading of consolidation patterns is the most common type of breakout trading pattern, such as top and bottom consolidation patterns, double tops and double bottoms, continuation consolidation patterns like triangles, flags, rectangles, and 1-2-3 patterns of wave trends can all use breakout entries.
The chart shows the K-line chart of the US dollar against the Japanese yen. On the left is a rectangle consolidation pattern, with the breakout point above. In the middle is a triangle consolidation pattern, with the breakout point also above. On the right is a double top consolidation pattern, with the breakout point below.
Breakout of consolidation patterns generally enters on the upper or lower edge of the pattern, and the stop loss is generally set at the high or low point on the other side of the consolidation pattern. For example, in a rectangle consolidation, if you enter on the upper edge breakout, the stop loss is set at the low point of the lower edge.(2) Pre-high pre-low pressure.
The chart shows the daily K-line chart of spot gold. Since 2024, the market has been in a bullish trend. The market has broken through twice, with the previous high pressure continuing the bullish trend.
(3) Moving average pressure break.
In practice, moving averages are often used as a dividing line between bulls and bears and as support and resistance levels. Therefore, there is also a trading method of entering the market after breaking through the moving average pressure in practice.
The chart shows the 1-hour K-line chart of spot gold. After breaking down from the top and breaking the EMA30 moving average, the market started to fall. Breaking the moving average allows for entry. The market broke the EMA30 moving average again and started to rise again.
Using moving averages as a break point is a more aggressive trading method. I added the resonance between the trend line and the moving average in the chart to filter the signals and improve stability.
2: When entering the market after a breakthrough, you can use order trading, but be aware of slippage.
The entry points for a breakthrough are usually pre-selected, such as the patterns mentioned above, where high and low points can be determined in advance.
After determining, you can use the order function on the trading software to hang the break order in advance at the break point. After the market breaks, the order will be automatically executed, which is very convenient and suitable for part-time traders.
Just hang the order and let the market run without watching the plate, which does not affect normal work.When engaging in order entry trading, it is important to pay attention to data-driven market movements. In the foreign exchange market, when significant data is released, the market can become extremely volatile, and trades may result in significant slippage. If this occurs near a breakout point, it is advisable to first cancel the pending order, observe the market, and wait for the right entry point before manually entering the trade.
3: Fake breakouts are an inevitable part of trading and cannot be entirely avoided; they must be accepted.
Whenever the topic of breakouts arises, many people criticize the issue of fake breakouts, negating the value of entering a position based on a breakout. Indeed, fake breakouts can be very frustrating. A seemingly perfect pattern may appear logical, yet the order is stopped out.
As a result, many traders try every possible method, using various technical indicators to filter out fake breakouts, but all attempts have inevitably failed.
In reality, all entry methods have false signals. If the market reverses after an entry on a pullback, a stop loss is still necessary.
In trading, not having a stop loss is neither logical nor realistic.
As mature traders, we can moderately optimize our breakout trading techniques to make the frequency, win rate, and risk-reward ratio of our trading signals reasonable. This allows for more wins than losses, with stable output of trading signals, rather than naively pursuing a perfect, stop-loss-free breakout technique.
Facing reality and being pragmatic is the attitude that a mature trader should have.
4: Selecting strong trend-following instruments for breakouts can lead to more ideal profits.
In strong trends, pullback movements are generally small, making it difficult to find a reasonable entry point for pullback entries, which can lead to missing out. Breakout entries do not have this issue, so breakout trading is suitable for instruments that have a strong trend, with large potential spaces and fast movements.For instance, in the foreign exchange market, assets such as gold, crude oil, the A50 index, and the Hang Seng Index exhibit characteristics that allow for the development of a breakout trading strategy. Of course, for highly volatile and rapidly fluctuating instruments, the demands on traders' trading skills are also high. For example, strict stop-loss practices are essential; otherwise, if caught in a one-sided trend, it could result in significant losses. With large price swings and larger stop-loss spaces, the success rate must be high, necessitating more precise technical skills.