Predicting and Trading Breakouts: Predicting Breakouts for Early Entry
Breakouts are an critical issue in trading that each trader confronts in some stage of his or her trading career. The need for a strong and conclusive technique to trade and predict breakouts is of high importance due to the frequent percentage of fakeouts in last years, which happen even more in intra-day trading.
Breakouts: Definition
A breakout occurs when price goes above or below a certain psychological level. Price should go above a Resistance level or below a Support level to define the movement as breakout.
Breakout Illustration
Predicting Breakouts using Momentum
Momentum can be a leading signal to signal an upcoming breakout. When price approaches a certain Support or Resistance level, pay attention to the velocity of the movement and the size of the candles. Big candles and swift movement indicate a strong momentum of price and a strong crowd that is pushing the price. This indicates high likelihood that a breakout is about to happen and the level will not resist the strong movement.
Big candles indicate strong momentum and willingness to break the Support level
Big candles indicate strong momentum and willingness to break the Support level
This momentum technique can also be applied to Volume. Trading volume gives us clues on the participants in the market and the strength of movements. If volume increases as price approaches a level, this increases likelihood of a breakout. More volume indicates more participants and therefore a stronger price movement.
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Predicting Breakouts: Weak Retracements
Another technique of predicting breakouts is what I call 'Weak Retracements'. This happens when price hits a certain level, but instead of bouncing and beginning a movement to the opposite direction, price retraces slowly, as if to regain power and test the level again. This indicates that the level is not strong enough to push prices in the opposite direction, and that breakout is imminent.
Slow retracement predicted the breakout of Resistance at EUR\USD
Slow retracement predicted the breakout of Support and AUD\USD
The following is also true when trading Fibonacci Retracements. A slow and weak movement with little volume indicate that this is not a real trend, but merely a retracement to 38.2% or 23.6% percent of the movement width. On the contrary, a strong movement indicate that price may not stop on a retracement but break and reverse its direction completely.
Predicting Breakouts: Upswings and Downswings
One can also predict breakouts by looking at the direction of upswings and downswings. Upswings are candles thatare higher than the candles around them, and downswings are candles that are lower than all candles around them. By looking at the direction of these swings, we can draw conclusion regarding the general trend of price and be warned of a breakout.
Rising downswings indicate that breakout is prone to happen
Rising downswings indicate that breakout is prone to happen
Predicting Breakouts using Tape Reading
Take reading can be a strong indicator of breakouts. It is extremely useful at the breakout itself. When price is close to a psychological level, a strong conflict between buyers and sellers. This conflicts is taking place in a form of a quick movement of price that revolves around the level. Price is moving quickly between the level. If price does not bounce from the level but continues to revolve around the level - it indicates that the level is not strong enough to push prices and that breakout may be happening. It is a subjective indicator but very powerful once experience is gained.
Conclusion
These techniques are very useful in predicting breakouts, though it is still a complex pattern to trade. Waiting for a breakout to be confirmed and trading the pullback can be a pattern with higher win rate.
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