Best Breakout Trading Strategy Used By Professional Traders (2024)

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In today’s article, we’re going to talk about breakout trading. We will cover some of the best trading tactics professional traders use to trade breakouts. Trading breakouts is one of our favorite entry types when trading the markets.

Our team atTrading Strategy Guideshas developed the best breakout trading strategy. It tells you right away when you’re wrong, which means that you can minimize losses. For more information, you can also read our strategy,how to use currency strength for trading success, and more information.

Minimizing losses is one of the hardest parts to achieve in trading. Although, with our strategy, it should be easier to understand. To be a successful trader, you must minimize losses and maximize profits.

To achieve profitability, we encourage you to read our top-notch guide on how to make money trading. The guide has received a lot of positive feedback from our trading community.

The principles taught in this article are universal to all markets. You can apply the same breakout trading techniques to stocks, Forex, bonds, and commodities. Also, you can apply these principles to the cryptocurrency market, no matter the time frame. If you would like to learn more, make sure to check out our article on multiple time frame analysis.

In order to trade breakouts, you need to understand what that means. This seems obvious, but far too many traders forget about the core basics of trading breakouts. For more information, read my personal trading plan reviewed by Kimm Krompass.

Let’s move forward and get into the basics and how breakouts can help you make money when trading.

What Is Breakout Trading?

To understand what breakout trading is, it is important to remember two types of breakouts. Our team at Trading Strategy Guides has identified two types of setups:

1. Support and resistance breakouts.
2. Swing high and swing low breakouts (swing trading breakout strategy).

So, what is breakout trading?

Breakout trading is an attempt to enter the market when the price moves outside a defined price range (support or resistance). However, a genuine breakout needs to be accompanied by increased volume.

A chart speaks more than words can do. Here is what support and resistance breakout trading should look like:

Please take out a piece of paper and a pen. What you’re about to learn next is crucial and needs to be memorized.

A genuine breakout is followed by a big, bold candle. The candle closes well above the support resistance level. In the figure above, this can be noticed quite instantly. As a rule in breakout trading, the bigger the breakout candle, the better.

What is breakout trading of a swing high and swing low?

We apply the same rules as the support and resistance but with an additional filter. What is this filter? We only want to trade the setups that offer us the best outcome. This is because not all swing highs and swing lows are created equal.

In this regard, we’re only going to attempt the swing high and swing low with a “V” shape form. A “V” shaped swing high is defined by a strong rally, quickly followed by a strong selloff. In reverse, the same is true for a “V” shaped swing low.

A price chart will clear any confusion you have about what a breakout trade with a “V” shape form swing is.

You might believe this by itself is an amazing strategy without adding anything else. However, this isn’t true. The biggest downfall with breakout trading is that there are too many false breakouts.

Our team at Trading Strategy Guides has developed the best breakout trading strategy. The strategy differentiates a false breakout and a genuine breakout. We have tested many technical indicators to develop the best breakout trading strategy. No matter how much backtesting we have done, one technical indicator always comes first.

Before we move forward, we must define this mysterious technical indicator. You’ll need to understand how to use it for the best breakout trading strategy:

Moreover, the only indicator you need is the volume-weighted moving average (VWMA). The VWMA is a simple technical indicator used for volume analysis. It is one of the most underused technical indicators that only professional traders use. VWMA looks like a moving average, but instead, it is based on volume. It’s not just a price-based moving average.

The VWMA is located on most trading platforms. Once it is applied to the chart, it should look like the figure below:

Next…

Let’s see if it’s a good idea to trade breakouts.

What Are the Pros and Cons of Breakout Trading?

Like with any type of trading style, breakout trading has its own unique advantages and disadvantages. Trading would be too easy if you didn’t encounter drawbacks. There is nothing that has no disadvantage, and breakout trading has its unique pros and cons.

Advocates of breakout trading can quickly point out the following advantages:

• The profit potential is instant. Profits are made fairly quickly, as breakouts can lead to aggressive price movements.
• Breakout trading uses the power of momentum.
• Has the potential to catch the start of a new trend.
• Provides clear trade management rules (entry and exit are predefined).

At the same time, if you have been screwed over and over again by false breakouts, you can easily point out the other side of the coin. It doesn’t feel good to buy the high of the day or to sell the low of the day due to a false breakout. It’s known that the main disadvantage of breakout trading is the fakeout.

Because of the increased volatility created by the breakout setup, it can be challenging to enter the market without slippage. So, how do you identify high-probability breakout trade setups and avoid fakeouts?

How to Confirm Breakout Trading

For the inexperienced trader, price analysis isn’t enough to confirm a breakout trade. A good confirmation tool to evaluate the quality of a breakout is the MACD indicator or any other one, depending on which is your “best breakout indicator.”

Also, you can confirm breakout trading with avolume profile. If you want to learn how to confirm a stock breakout, then we suggest trying the volume profile indicator, which is more relevant in the stock market.

However, the MACD indicator is more accessible and an excellent way for a trader to enter a breakout in the early stage of the setup.

Even if you have confidence and faith in a breakout setup, it will not save you from potential fakeouts. You still need to have some sort of risk management technique and other ways to confirm breakouts.

Our secret favorite way to identify breakout trades right before they happen is to look for clues from the price action. This technique requires some time to train your eyes. Let me explain…

The biggest thing we like to look after is tight consolidation at key support and resistance levels. See the chart below:

In this area, price moves within a narrow range, which often leads to explosive breakouts. When you see the range of the candlesticks getting smaller and smaller and compressed within a tight box-like price action, something has to give in and break under the pressure just created.

Now, before we go any further, we always recommend taking a piece of paper and a pen. Then, note down the rules of the best breakout trading strategy.

Let’s get started.

The Best Breakout Trading Strategy (Steps for a Buy Trade)

Discover the optimal approach to breakout trading with our detailed guide. Learn the steps to effectively execute buy trades and harness market momentum for maximum profitability.

Step #1: Identify a Clear Price Range or a “V” Shape Swing High and Mark That Price Level on the Chart.

The first step of the best breakout trading strategy requires identifying the price level. It can ultimately be your breakout trading level. This is the most important part when attempting breakout trading. Moreover, this is why we only want to recognize significant and clear levels.

Do you want to boost your knowledge in identifying these levels? We recommend spending five minutes to read our article on support and resistance. This section will teach you methods to help identify the right support and resistance level.

The resistance level we have identified in the figure above is significant. If you look closely, you’ll notice each rejection off of the resistance level left behind a minor “V” shape swing high. We had strong rallies that quickly faded away.

These findings bring us to the next step of our best breakout trading strategy.

Step #2: Wait for a Break and a Close above the Resistance Level.

Once the resistance level has been identified from there, it’s just a game of patience and waiting. We need a breakout and breakout candle to close above our resistance level. This is a sign that the bulls are in control.

However, we’re not done yet. We still need confirmation from the VWMA indicator. This will give us the green light to pull the trigger on this breakout trading.

Step #3: Buy at the Breakout Candle Closing Price Only If the VWMA Is Stretching Up.

The third step of this trading strategy is the needed confirmation from the VWMA. We need to visually see the VWMA stretch up, and the moving average needs to have a deeper inclination to the upside.

Let’s check this on the price chart.

This can be clearly visualized on the price chart. Prior to the breakout, the VWMA only gradually moved higher after the breakout happened. We saw the VWMA aggressively moving higher, which showed a strong volume presence behind the breakout.

After we bought it, we still needed to define where to place our protective stop loss. We also needed to know where to take profits. This brings us to the next step of this trading strategy.

Step #4: Place Your Sl below the Breakout Candle and Take Profit When You See a Break below the VWMA.

It was obvious to place our protective stop loss just below the breakout candle. This is because once we break below the candle that initiates the breakout, it proves to us that this is a false breakout. No real buying is taking place, so we better back out of the trade.

Our take-profit technique is intuitive because a break below the VWMA suggests there are no more buyers to sustain the current rally. We want to book the profits at the early sign the market is ready to roll over.

Note: The above was an example of a buy trade… Use the same rules but in reverse for a sell trade. In the figure below, you can see an actual SELL trade example using the this trading strategy.

Final Thoughts: Breakout Trading

One of the main advantages of this trading strategy is that you’re trading with momentum on the back. This means instant gratification. You’ll also learn fast whether or not your breakout trading idea will work.

We have one final tip. If the breakout has as a catalyst a big new risk event, then it’s more likely that big institutional money is behind this breakout. When you have the technicals and the fundamentals working for you, the trade success profitability increases. If you want to learn another strategy, feel free to check out our article about trading volume in Forex.

Additionally, our step-by-step news trading strategy can be very helpful here, so please don’t miss the opportunity to read it.

Thank you for reading!

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