Is there any way to predict that the potential of a breakout can lead to a successful trading position?
While nothing is guaranteed, can we see certain things in price that points to a higher probability that trading the breakout can lead to profit?
All it takes is for some understanding of the context you find yourself in.
Good Breakouts Are Preceded By Certain Price Movement
Breakouts usually come from a range unless you are talking about retraced price taking out highs or low. What happens inside the range is what we can monitor to predict if a breakout has a chance of success.
What do we want to see?
- Smaller rejections off the highs or lows
- Price basing under resistance or above support
- Certain gaps in price
Let’s take a look at each of these 3 identifiers so you are able to dive into your own charts and test it out.
Good Breakouts Start With Smaller Price Rejections
Traders tend to buy things that they feel are going up in price in the near future. Of course selling is expecting lower prices.
What does that look like on a chart?
As soon as price stops making higher highs in an uptrend, I look for the beginning of a trading range. Trading ranges eventually resolve into a breakout:
- Price may fail at the breakout level multiple times before finally moving
- Price may breakout of the trading range and then pullback into the range (this does not invalidate the breakout)
- Price may breakout and range just above above the level
As you know, an up trending market makes higher highs and higher lows. In a range, we want to see price making higher lows as the rejections off a resistance zone get weaker.
On this chart, you can see the percent change in each down swing prior to the break of resistance. Price eventually rose 1.5%.
What is happening is even though prices are not going higher, buyers are still stepping in at higher prices. Keep in mind this is silver against the USD. Also consider that the higher lows are plotting because less selling can also be happening.
Either way, there is an edge to a bullish move and a higher probability of a breakout succeeding to gain upside traction.
Price Range Under Resistance/Above Support
Considering a consolidated market, we can also see price reach the top of the range or the bottom, and sit there. Barring any sort of price spring or upthrust, this is another sign of predicting a successful breakout.
What I like about the basing is when I see a spring (a poke below the bottom of the basing and a quick buy up. That, for me, is an entry point as the probability lean to a breakout that will have traction.
Even if the breakout does happen to fail, you were in the move early enough that allows some type of trade management.
You may have to drop down to a lower time frame to see the detail of the base. For simplicity, I would use the daily for the setup and sometimes the four hour for entry.
Breakaway Gaps From The Trading Range
Unlike the other ways of predicting a successful breakout, the breakaway gap will happen after multiple test of support or resistance in a range.
With this gap, price will rocket from the range and never look back as seen in this image.
This gap is not filled which means your breakout is a success. You would use your tools and trading tactics to take part in the subsequent move.
Predicting Breakout Failures
Anything can happen in trading but there are some things I look for to discount trading a breakout or at least manage the trade aggressively.
The main one is a sudden spike in price from the low of consolidation to a breakout.
This is not the best example but it’s close. Price rockets from the bottom of the range and breaks out. There was no entry on this time frame before the momentum candlestick plotted. I would not look for a trade entry when price pauses. I predict, from this move, that price will probably retrace.
Traders that got in at the bottom became profitable quickly. Any pause in price will cause them to want to cash in those profits.
As you see, price does pullback into what was previous resistance. What’s the next play? A pullback after a breakout. This is where a trader may want to consider an entry.
We are looking for signs that a breakout could be successful and these 3 ways can help you predict which breakouts could pay.
Anything can happen in trading and we looking to tip the odds, give ourselves a little edge, to make money. Don’t just look at the bars on your charts but try to understand why something is happening.
- Why is price not rejection far from a support/resistance zone in a range?
- What does the basing mean?
- What does it mean when price pokes below a level and springs up during the basing?
Answering those questions can help you decide which breakouts or potential breakout are worth considering.