Trading Breakouts Can Be Fun.But..They Can Also Ruin Your Trades

Hello and welcome to another edition of the bulls vs the bears. Today my message to you is this:Breakouts can be fun, But they can also ruin your trades. By that I mean trading breakouts can cause you to lose your trades. IF you are rookie trader, trade breakouts at your own peril. It is very tempting to get sucked in to trading on new lows(downtrend) and trading on new highs(uptrend) . Noq I’m not saying do not trade breakouts. Breakouts do possess great profit potential. Except that if you follow the herd, you will get gulped up by the market.

Sure it’s okay to trade with momentum. You may say to yourself”This trend is very hot. Let’s jump on the bandwagon here. Newsflash! Breakouts can force you into a whiplash it will make your head spin. Instead just wait for the market to pull back to the support/resistance area where you get more price signals lined up. There are some trades that make say”Hmmm..This trade has a million dollars written all over it. Then you jump in as if you just won the lottery only for the market to do a 360 on you. You are then looking like a deer caught in the headlights wondering”What happened here?” Well the market is unforgiven towwards rookies. So you need to contemplate carefully before you jump in.

So today I’m going to show you some real life examples of trades that can suck you in only for the market to whiplash into the opposite direction. You could lose your entire account on such trades. Sure it’s hard to ascertain where such mouse traps spring from spring from. But at least you can learn from the carnage these traps create and not repeat these mistakes again.

First Pic Please

This is a classic example of a failed breakout/false break at the key level via the GBPUSD pair. Just see how the bears break through the key support during the downtrend only for price to do a 360 and make an upward push. of course those overcome by greed are left standing there holding the bag with their tails between their legs.

Pic No 2

This is another example of a failed breakout attempt by the bears inside the channel vis the EURUSD pair. Basically price takes a plunge and recovers as illustrated by trendlines connecting September 1st and 21st highs and September 8 and September 25th lows. The bears anticipated slalom breakout fizzled out with the doji at the tip of the channel

This is the type of breakout that easily sucks in rookie traders who like to follow the herd. Once they get stumped, the pros turn in and whiplash price in the opposite direction. That of course will leave a black hole in your trading account every time.

Pic No 3

Here we see a clear false break above a key resistance level in the GBPUSD pair. Initially the bulls mount a strong push only to be repelled by the bears. Of course this causes price to create a sharp reversal. This strips so many amateur traders out there-especially those to looking to cash in early.

So now that we have ascertained how risky trading breakouts can be, The burning question on everybody’s mind is

What’s The Alternative To Trading Breakouts?

Well rumor has it that the best alternative to trading breakouts is retracements or pullbacks. This is where price temporarily drags back after a sustained trend period. It usually occurs at key levels and it is at this juncture where you find multiple opportunities for price entries.

Let’s take a look at a few examples

Pic 1


Here we see a classic example of a pull back in action visavis the GBPUSD pair with the help of moving averages. Notice the way the 13 day EMA line(Red Line) crosses the 21 day EMA(Green Line). This suggests a pull back, and,even more important, it suggests a price signal. Also it’s happening on the daily chart frame where you have a much higher higher chance of making making a solid profit. Plus, you don’t have to worry about false breakouts in this setup. It’s as clear as day.

Let’s look at another pullback example


Here we see another example of a pullback but this time in the downtrend. See the way the Red EMA crossed the green EMA. This signals another pullback, which of course means a signal to make your entry. Once Red EMA croses Green EMA it means the pullback has ended and that the downtrend has resumed. Pullbacks make for very valuable high probability setups. You’d do well to make that part of your trading plan.

Now let’s look at a pullback situation where the trend has confluence


Here we get confirmation that the downward trend has begun. Not only that but you have multiple signals along the key level . This phenomenon is popularly known as the power of confluence. The downward trend is confirmed by the moving average crossover and the sloping trend line. Initially price suffers a humiliating rejection at the 1.5750 level. In this setup just put on your hunter’s hat and wait for the bearish pin par to appear. This then confirms that the bears shift is over. You then make your entry when price dips just below the tips of the pin bar. This should bring you decent profits with little or no risk.

You see the power of confluence in this chart? With these multiple factors your odds of winning a trade increase by a hundred fold. By using a combination of a solid trend, support and resistance , and price action bars, You cut down risk and increase the probability of achieving huge profits.

If you want to know how moving averages work, look up We are Moving Averages Part I and Part II

That’s s wrap for “Trading Breakouts Can Be Fun. But..They Can Also Ruin Your Trades.” Breakouts can lead you into a ditch especially if you follow the herd blindly. Now I’m not saying you shouldn’t trade breakouts. I’d be the last person to ruin your fun. But you do need to tread with care when trading breakouts. Failure to do the right checks and you risk being eating alive by these breakouts.

Sure it’s only natural that you want to put in a trade because you strongly believe that the market is moving in the direction you want to trade in. However, you need a trading plan that allows you to take advantage of these breakouts instead of you being swallowed by these breakouts.

Til next time take care.

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