When I all got started in trading and got to know about breakouts, patterns and all those things, so what I used to do was chase big green candles in FOMO, enter at highs and due to this I lost most of my trades chasing breakouts.
So how to avoid those false breakouts?
One thing to remember in trading any kind of financial instruments and in technical analysis is there is no 100% accuracy or strategy which will avoid false breakouts so the most we can do is minimise it!
1. Avoid Big moves/Big Candles/Sudden moves.
Why should we do this?
- Market that moves in higher highs and lower lows have something for the support.
- These kinds of moves are sustainable that create higher highs and higher lows where higher lows act a resistance
Now we'll look at parabolic moves:
- In the above image as there is no support structure, stop-loss has to be huge, which will not be a feasible risk-reward ratio.
- And the downfall will be drastic in proportionate to the decline of the price.
- Also entering at such a high price after these parabolic moves and expecting it to move more upwards will not be a logical reason as we can see the sudden decline in price after a sudden upward movement.
**2. **So how do you trade breakouts and breakdowns?****
- We should try to trade consolidations.
- For E.g. Ascending triangles, Descending triangles, Ranges Etc.
- As we can see in this image higher lows are being made, Which means sellers are getting weak with every swing from the resistance.
- And due to resistance being tested multiple times it finally breaks outs continuing the trend.
Now we'll look at a live e.g.:
- In the following BTC chart we can see higher lows being created, Resistance being tested multiple times and finally a breakout and a retest.
- Also what we a risk-averse trader can do is go long on a retest on such a scenario.
- Using indicators to your Advantage.
- We can use indicators to identify Consolidation zones.
- For e.g., macd's histogram is a great tool to get an idea of consolidations
- I've written a Post on MACD and all the things you need to know about it.
- Macd's histogram shows us how the trend is getting exhausted and resulting in consolidations and then breakout's
So these were my experiences with breakout trading and how I improved upon it.
Good luck trading!
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