For a breakout trader, the most important problem to solve is to determine if the breakout is real, usually, to determine this we usually wait. waiting for confirmation signals (closing candles), but in many cases, the price has gone too far, destroying the RR ratio and not having a good entry point.

In this article, we will find the solution of how to both enter early and minimize the trading of false breakouts.

Characteristics and psychology behind the breakout

A breakout is understood when the price exits a consolidation or when the price penetrates a certain resistance/support area, the break is considered successful when the price can continue to move. in the direction that it kicks the resistance level.


Breakdown traders believe that when a break occurs, for example, an upward breakout, the market is optimistic about the traded product, more and more. people wanted to buy more while the key sellers, around important price levels, gradually gave up and exited the market. Therefore, the potential for prices to continue to go up is very high. The logic is similar for a downward breakout.

How does one identify a high potential breakout before it happens?

So is there a way to identify a REAL breakout before it happens? The answer is yes, but note that there certainly cannot be 100% probability.

With this technique, you can improve your ability to accurately judge a real break, characteristics including:
  • Successive high lows were established. This is the first sign of an authentic breakout. This price action simply shows that the market participants are willing to buy at a higher price.
  • The moving averages are pointing up. The moving averages we use shouldn't be too fast (as low-period moving averages often have lots of noise before a break occurs). We should use the large period moving averages, for example, 50 periods. And it is important to see that it is pointing up, in the same direction that we expect the breakout to occur.
  • The "build-up" areas appear. Simply understood, these are areas of price accumulation in a narrow range prior to breakouts, it is also the area where buy orders can accumulate. And we can look for entry opportunities at the bottom of these zones
For the down break, we apply the same rules but the opposite.

Every strategy has its advantages and disadvantages, and to make good use of the strategy, you need to fully evaluate this issue!

Advantages:
  • There is preparation in advance through identifying price action signals long before the breakout;
  • Better entry point, much higher RR level than breakout trading;
  • Minimize losses in the event of a false breakout (narrower SL level);
  • Relieve the pressure when looking at volatile orders, because the entry point is very good;
Defect:
  • Requires a lot of experience in reading market structure and price action;
  • The opportunity may be missed when the price does not retest the "build-up" bottom but increases sharply and creates a new trend;
Easily scanned for stop losses in case the build-up area is unstable.