The big headache for most traders is how to realize real and consistent profitability in the markets. This may be due to the amount of nonsense about trading strategies that there is, especially in breakout trading. Convention says to look for moves based on already established trends, but often the desire to make money outweighs frustration and financial loss. Too often, traders jump into the latest popular buy or sell trend, only to watch it shift against them. Which begs a very pertinent question: is there a better way to do breakout trading?
What follows is good news for breakout traders: there is a sudden, deep change in the approach to breakout trading—from desperately chasing the crowd to an understanding of real market psychology. By determining when the average trader is wrong and how to make money from it, you create an excellent edge. This strategy will work inside many asset classes, ranging from stocks over forex and futures to cryptocurrencies.
In this article, we’ll explore one rather unusual breakout trading strategy that runs in direct opposition to conventional thinking. We’ll take a closer look at how to enter trades when the average trader gets stopped out, how to align yourself with higher time frame momentum, and what a cycle indicator can tell you about timing your entries. By adopting this kind of thinking and this approach, what may have been frustrating called breakout trading can turn into a potentially very rewarding opportunity.
Breakout Trading Paradigm – An Understanding
Breakout trading typically involves entering positions when the price breaks above a resistance level or below a support level. However, the common reaction from traders is to buy into the excitement of a rising market or to panic-sell during a falling market.
- Stay Away from the Crowd: A lot of what traders accept as gospel can be misleading. For instance, one may believe that through a trend, the market would be obligated to have higher highs and higher lows. But this oversimplification overlooks the extravagant fluctuations the market can make. Therefore, real trends often deviate from these conventional patterns, and your approach needs to change accordingly.
The Psychology of Trading
Understanding the psychological aspects while trading will go a long way in improving your success rate. Many traders operate under the misconception that their strategies must follow the dominant market trends, often resulting in decisions driven by fear and greed, which can lead to losses.
- Focus on Market Signals: It’s all about shifting your focus from the actions of others to what the market is essentially conveying. This perspective produces opportunities when the average trader is wrong. You may notice that had you taken the opposite action in normal trades, your financial position could have been stronger.
The Breakout Strategy: How to Trade Against the Crowd
Here are some practical ways to develop a better breakout strategy:
- Buy When Losers Sell: This approach focuses on entering trades when the average trader exits the market. When traders panic-sell during market downturns, it can present an opportunity to buy at lower prices. Conversely, when the market reaches a peak and traders jump in, it might signal an imminent reversal.
- Spot the Moment: These moments occur when the market creates a lower low in an uptrend or a higher high in a downtrend. Professional traders step in here to provide liquidity to the market and capitalize on the panic of average traders.
- Align with Higher Time Frame Momentum: To refine your breakout strategy, check the momentum on higher time frames rather than only focusing on short-term price movements.
- Bullish Momentum: Look for situations where both the short-term and longer-term trends are bullish. This alignment increases the probability of successful trades.
- Bearish Momentum: When both time frames exhibit bearish momentum, it’s an opportune moment to enter a short position.
- Time It with Cycle Indicators: Cycle indicators can help refine your entry points by defining the highs and lows of cycles, enabling better timing for your entries and exits.
- Timing is Everything: Instead of blindly buying every lower low or selling every higher high, wait for signals from the cycle indicator that suggest a probable reversal in the direction of momentum.
Application of the Strategy in Practice
Imagine you’re watching a stock making a higher high, followed by a higher low. Many traders would likely jump in to buy at this point, anticipating the continuation of the upward trend. Instead, you observe that the price approaches a key support level where panic selling might occur.
- Capitalize on Panic: Once this support level is broken, the average trader may exit in fear, providing you with the perfect opportunity to enter the market. You would also have more confidence when both the higher and lower time frames reflect bullish momentum. At this point, your timing is better informed by understanding market psychology and the trend.
Conclusion
Is this breakout trading strategy a fast-money glitch? It can certainly feel that way! In this article, traders will learn how to understand and apply this approach to capitalize on market movements while avoiding common pitfalls.
- Focus on: Entering the market when the average trader exits, aligning with higher time frame momentum, and using cycle indicators to improve timing.
None of these strategies can guarantee success, but they represent a conceptual leap in breakout trading, significantly increasing the probability of positive outcomes. As you gain experience and refine your approach, you may find that what was once a frustrating aspect of trading evolves into an unusually rewarding opportunity.
If this strategy sparks your interest, consider additional readings and tools to deepen your understanding. Remember, successful trading is not just about following trends but also about understanding market psychology and making decisions that set you apart from the crowd.
