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9 tháng 2, 2022

Breakdown of price levels: stable profit on any asset

Breakdown of price levels: stable profit on any asset

One of the proven variants for finding profitable entry/exit points even before the advent of computers in stock trading will be a breakout trading of strong price levels. Its main feature is that the trader sees the right decision or not already on 2-3 candles after the breakdown. If there is no breakdown, you can quickly close the position because the minimum loss in money management is much more important than profit.

The article shows how to determine the correct breakdown of the price level in the market and several universal Forex trading strategies that work consistently profitably on all currency pairs and timeframes.

Trader's comments:

Any significant event in the market is accompanied by a breakdown trading range. The figure shows a classic change in market phases: lateral movement (accumulation) when buyers and sellers accumulate the potential for further continuation of a trend reversal is replaced by periods of sharp movement (distribution). Breakouts of levels are clearly visible when these periods change. A similar picture can be seen on any currency pair. This is one of the best opportunities for profit.

Factors that cause a breakdown of the price level

When a fast upward/downward impulse is observed on the chart, this may mean the beginning of a change in the balance of power between buyers/sellers. Moreover, the impulse that forms a breakout in trading can be both trendy and reversal (countertrend).

In the second case, you need to take into account that this can only be a local correction - the trend can resume. Additional information is provided by the dynamics of the market volume in the case of the Forex tick. A sharp increase in market interest (volume) confirms the beginning of a change in the situation. Especially on fundamental events when the price approaches historical (daily, weekly, monthly) max/min.

Trader's comments:

An increase in activity is a prerequisite for a trading opening range breakout. The activity of both sellers and buyers should grow, no matter where the breakthrough will be. Some are trying to expand the market, while others are trying to hold positions. If only one "part of the market" is growing, you need to wait; perhaps only pending orders are opened that does not affect the price movement now.

If the market is not active, there is a high probability of only a speculative impulse. You can also make money on it, but this applies more to scalping than breakdown strategies.

The longer the price goes inside the trade channel (trend or side), the more the open “trading interest” increases, which is always followed by a breakdown. There are enough profitable entry points on it. Now that the causes of breakouts are clear, let's look at the most important factor in successful trading.

In addition to the growth of activity, the presence of a breakdown can be determined by the dynamics of changes in market volumes, In the Forex market they are only tick showing only the number of transactions per unit timeframe, but they give fairly accurate signals. Volumes in the trading breakout strategy should always grow, see examples:

Trader's comments:

It is necessary to separate the growth of traders' activity and market volumes – these are different market parameters for breakout trading. An increase in activity means only the first sign of future market changes, and when volumes begin to grow, the decision is made, an active price movement begins.

Next, the main patterns of price movement before the breakdown of most Forex assets:

Trader's comments:

You can correctly determine the breakdown only visually on the price chart. In the image, the schemes are shown without market "noise", you need to learn how to “see” the price movement between levels, even if the best indicators for breakout trading are used. Schemes in an ideal form rarely appear, but the general structure is preserved.

"True" breakdown

So, what is a breakout in trading? This is the intersection of the quote by the price chart, which has a strong influence on the further movement of the market (support/resistance of trend ranges, local max/min, etc.). At the same time, the probability of continuing the movement along the breakdown is greater, correcting, or returning to the initial values.

The situation will develop in two ways:

  • The level turns out to be "stronger than the price" (retest) and a rollback begins. In the case of a trend corridor or another range to its opposite border.

  • The price remains above/below the level and continues to move – a "true" breakdown. 

The more retests with rollbacks, the stronger the level and you need to apply more volumes for its real breakdown. The probability is especially high after 2-3 pullbacks, better on several timeframes. Then we look at the breakout forex trading strategy, getting ready to open the next position with a new movement or reversal. Example:

Trader's comments:

A simple breakout trading strategy for beginners to break through the weekly min/max. If you look at the daily chart, where the current weekly min is indicated, it seems that there was more of a rebound than a breakdown. Here you need to understand that all examples of market situations are shown in history when it is already clear how it all began and how it ended.

The trader in the current market did not know how the day would end – in other words, the "right" part of the chart does not exist for him. He just saw how the price went down after the opening (the lower shadow of the next green candle). Perhaps there were all signs of a breakdown down, he opened the first SELL deal.


Then the price returned to the level and began to move sideways. To better control the situation, go to the forex breakout trading strategy on the hourly timeframe. Retests appear and after the third, when the conditions for confirming the second breakdown are additionally met, we open BUY. Take Profit and Stop Loss values ​​are calculated based on the previous candle on H4.

Mandatory properties of a "true" breakdown:

  • The reliability of a "true" breakout is even greater when the closing point is removed from the level or border of the trade channel by the average volatility over the last 3-5 periods.

  • The Close price of a breakout candle should be at least 10-15 points from the level. The reliability of the signal increases when both "shadows" (max/min) are also located above/below the level.

  • The price movement above/below the level of at least 2-3 candles actually confirms the breakdown. If we take the time, then 2-3 hours with intraday breakout trading strategy can also be considered a confirmation of "truth".

"True" breakouts on a real chart:

What is a “false” breakout in trading?

From the point of view of technical analysis, a "false" breakout of a significant level is considered to be an impulse after the end, followed by 2-3 reversal candles returning the price to the initial (or almost) initial value. You can try to close the current one and open the opposite deal if the Stop Loss has not closed yet.

"False" breakouts have a greater psychological component than "true" ones. This is a direct reflex of the bulk of medium and small players who are trying to enter the trend without a thorough analysis of the situation. Although several consecutive "false" breakouts give the first signal of a near trend change. The main thing in breakout trading is to stop thinking “as the crowd” and make an independent decision.

More options for "false" breakouts from market makers:

Trader's comments:

Long-term market trends almost always have “false” breakouts (retests) at their beginning. New support/resistance, reversal levels (Murray, Fibonacci, etc.) is formed on them, where the market “crowd” opens the next transactions. Here you can try to act oppositely and earn against everyone. Even those who use the best breakout trading strategy.

To determine the "false" breakdown, we do the following:

  • The trend and levels must be confirmed on the higher and lower timeframes relative to the working one. When there is a continuation of medium- and long-term trends, and there are retests in the working period, then only market makers are really speculating on the market. Short-term trends will end soon, scalping strategies and advisers are better to stop and close positions. As always, the signal is more reliable, the larger its timeframe!

  • The second confirming factor will be the candlestick patterns near the broken levels. On the channel breakout trading strategy, constantly control patterns such as "Head & Shoulders" and "Double Top/Bottom". Their key points and lines are formed precisely in the areas of the greatest open interest of sellers or buyers. So there will be a lot of false impulses with quick returns.

Trader's comments:

False breakouts often occur due to incorrect determination of levels, especially the boundaries of trade channels. These are often retests and with the right boundaries, they can be worked out correctly.

  • Next, we look at where the Close price is: for BUY above the level, for SELL below. If the shadow is a few points near the border, this does not mean a false movement, perhaps a real breakdown.

  • False breakouts often accompany price chart divergences and oscillators such as the MACD. If the support line is broken, we have a bullish divergence, the resistance line is bearish. Trendline breakout trading strategy will show, but the fact of the breakout itself is not of great importance for analysis.

Trader's comments:

Divergences rarely appear. The example shows that they are only a trend indicator; most breakouts on them will be false.

Example confirmation of a breakdown by a candlestick pattern

The best results from a "true" breakdown are obtained on reversal patterns, such as the Pin-Bar of the Price Action trading technique. The recommended timeframe is M30 and above. Visually, it looks like this on the chart:

Two situations may occur when confirming breakouts on the Pin bar. Also, do not forget that the probability of correctly working out the Pin-Bar in the breakout forex trading strategy increases if they are nearby:

  • Supports/Resistances;
  • Past monthly, weekly and daily max/min.
  • Fibonacci retracement levels and extensions;
  • Moving averages with periods of 50 and more;
  • Pivot Point levels (more details later in the article).

Trader's comments:

The image shows examples of two "classic" patterns, we will not talk about them. Learn more about where you can go wrong when trading these patterns:

  1. Inside Pin-Bar. The entire candle with shadows is “inside” the previous candle, the situation can be both uptrend and downtrend. Beginners and simple breakout trading strategy see only the Pin-Bar without a general analysis of the situation. This often happens on the M1 timeframe: the price moves quickly, Pin-Bar every 5-7 candles, I want to open a deal for each “catching” a reversal.

Let's think without excitement about the meaning of such a candle combination? Answer: there will be no breakdown, the trend will stop and go into consolidation. It doesn't matter what the shape of the candle is, if it is ”Inside” it is better to skip the signal.

Important: you can try to trade when the "body" is inside the previous candle by 2-3 points, but most of the "nose" should be higher or lower.

  1. Doji. A strong reversal pattern at the reversal points of trading channels. Then you can open a trade without waiting for the Pin-Bar to appear. Doji may continue the trend, be careful!"

We open the position only after closing the "nose", pending orders at the "ends" of the figure are recommended. The StopLoss value is 5-7 points from the "long" shadow. You can get the maximum profit by adding a Trailing Stop or partially closing the transaction volume at the next significant levels according to the trend. We monitor the volatility, if it grows, it is better to close the deal!

Technical Breakout Strategies

All trading breakout strategies can be divided into two main groups:

  • Opening a position only after confirming the "true" breakdown. Closing the candle behind the level, we set a market or pending entry order in the direction of a new movement. For BUY - above the level of a possible breakdown, for SELL - below the level;

  • Opening at the end of the rollback (better than the second one) in the direction of a possible breakdown, usually with a market order. Only for experienced trainers!

Classic closing of positions breakout trading - by Stop Loss, Trailing Stop, or other strict rules of management. While the volumes that caused the breakdown have not completely closed, there is a high probability of a rapid rollback. Look at the basic examples.

The image shows an example of a trading range breakout, in which the levels and the first signal of a trend change will be the Moving Average. This is followed by confirmation from the Stochastic oscillator: if the indicator is in the overbought zone (above the level of 80), this means that buyers have almost no potential for the price to move up.

Trader's comments:

All variants of such breakout Forex trading strategy give stable profits with the right settings.s give stable profits with the right settings. The value of the levels may vary depending on the volatility and characteristics of the asset. For example, 70/30 or 60/40, but the standard 80/20 levels work in price breakdowns well most of the trading time.

The next level will be Pivot Point: they are calculated based on the opening/closing of the previous day, their values ​​do not change. All traders see the same levels - both market makers and ordinary traders. Example trade:

Trader's comments:

We always look at how the levels are located relative to each other over the past 2-3 days. The first will be the "classic" breakdown of the level. Note the candlestick with long shadows on R1, a Doji candlestick pattern, and the long shadows indicate a buyer/seller struggle on this Pivot. The next candle confirms the continuation of the uptrend according to the trading breakout strategy, you can open BUY by taking Profit on R2.

Then we see the "merging" of the levels of the current and previous day. The level becomes "stronger" not only at the breakdown; the probability of a rebound also increases. So the second-day market makers have a reason to "keep" them on the market. Before making a decision, we are waiting for the results of the next 2-to 3 retests.

Pivot levels are often used in automated advisors. Especially price channel definition, for intraday strategies on timeframes H1-H4. It is convenient to automatically place Take Profit and Stop Loss orders on them. The xSignals software allows you to quickly assess the price movement relative to the Pivot without installing additional indicators. It is enough to select the desired asset in the “Dashboard” settings.

Pivot levels can be not only mathematical but also analytical. Testing on the Forex breakout trading strategy showed that they can more accurately indicate the place of a possible opening of a transaction. The most famous of this group are Rudolf Axel's daily analytics.

The next level popular in breakout trading strategy will be Fibonacci. The tool is included in the basic set of all trading platforms. They are built after the end and reversal of the trend, for more information, see the Internet.

Trader's comments:

To build Fibonacci retracement levels, the trendline breakout trading strategy should use only "long" movements, as in the image. Then there is a guarantee of working out at least 2-3 levels. More “short” ones can only be corrections or rollbacks and you won’t get big profits on them.

For example, the levels work "classically". There is a flat in the 0.0 – 23.6 zone, indicating profit-taking after the trend ends. The movement may continue, you should not immediately open BUY! 

Then the market decided on the uptrend, and the levels began to break through. There is a desire to open one deal for the purchase after the breakdown of the first correction with Taking Profit at the level of 100.00. This is possible, but it is better to open consistently according to the breakout trading strategy signals after each breakdown and fix the profit at the next level. During the movement to 100.0, there may be rollbacks, corrections, and consolidations. All this time, the deal will have to be kept open, and this is an additional risk with high volatility.

After the breakdown of the 61.8 level, we are preparing to close positions without expecting an approach to 100.0. There are levels higher, but they are more for market makers on medium-term (from several days) breakdown strategies. On intraday, most trends end, as in our example, and a reversal begins.

You can make a new construction of levels according to a new trend. But, if the previous Fibo works, this can not be done!"

Let's finish the brief review with a channel breakout trading strategy. They can be used both separately and in combination with Fibo and Pivot levels. When they break through not only the price but also the boundaries of the indicator, this strengthens the signal. Example trade:

Trader's comments:

When using strategies or automated advisors with breakouts of channel indicators, you should always look at what type of instrument is being used. Technical trading channels can be divided into two main groups:

  1. On the Moving Average. In our example, these are Bollinger Bands: the average MA and even higher and lower for a given distance. Many best breakout trading strategy (Envelopes, Keltner Channel, etc.) work according to this principle. If they are used, most of the real breakouts will be on the middle line when there is a rebound from the boundary MA.

  1. By max/min. This is how the Doncial Channel shown in the example works - the horizontal sections are at the max/min of the last 28 candles (the amount can be adjusted). Thus, we do not need to search for the necessary levels ourselves and trade on their breakdown."

Recommendations about use …

  • If you decide to trade breakouts on M1-M5 timeframes, you need to be prepared that most of them will be false. It is very easy to expand the market here, let's add even a little open interest. This is especially true on Friday, when the Forex market closes earlier. When 3-4 breakouts in a row end in losses, quickly close positions even manually. Don't wait for the next Stop Loss!

  • A non-standard variant of intraday breakout trading strategy will be trading "round levels” - quotes ending in 00, 20, 50 and 80. Example: 1.1350 (EUR/USD), 115.00 (USD/JPY) and others. They will be significant "psychological barriers". So the price in the supermarket of $9.95 is always subconsciously compared to $10. The habit of rounding remains with traders, as with all people.

This habit is strongly visible at the level of 00 and 50. Forex statistics show that pending orders of large volume start to be active there or strong support and resistance appear.

Quotes of 80.50 and 10 are quickly worked out within a day. Prices “50” can be called halfway to 00 both down and up with the acceleration of the trend. The numbers 20 and 80 speak more about local corrections and rollbacks. Example:

Trader's comments:

Even on small timeframes like M5 round quotes are a good profit level if you are patient. Look for example: for 10 hours inside the day, we have three excellent entry points even without the price channel definition, confirmed by the overbought/oversold oscillator.

Additionally, you can build a "grid" on quotes 00, 20, 50.80 and try to trade by analogy with Fibonacci on timeframes M30 and higher.

As always, do not forget about the position of "round" quotes relative to graphic patterns and these indicators!

  • We do not open trades before -/+ 30 minutes of publication of strong fundamental news; it is recommended to close current positions on any breakout trading strategy. Example trade:

Trader's comments:

A fundamental event is almost always a guaranteed breakout trading, even its time is known in advance. You can make a profit, but this strategy is the most difficult. The image shows an example of why beginners are not recommended to trade like this:

  • On the right is an example of how the news worked "correctly". Probably, the data came out worse than expected; the market reacted with a breakdown down followed by a downtrend. There is nothing to comment on.

  • Not all is well on the left. The first impulse after the publication broke through the current price level upwards, but then a rollback began, almost to the initial values. Everything happens quickly, you may not have time to close the order and get Stop Loss.

Conclusion: Fundamental analysis is not a breakout trading strategy. They use other techniques.

  • We improve the quality of signals by analyzing several timeframes, regardless of the types of levels. Older timeframes from M30 and above are required. The levels should not be 100% the same, it is enough to find them in the range of 5-10 points.

Summarize. What is breakout trading? A good opportunity to make money on Forex.  Despite the increase in the share of High-Frequency Trading (HFT), people continue to move the market. So there will be trading on the breakdown of price channels. The main thing is to take only "true" breakouts and not forget about money management.