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You are glued to your chart as you watch the price breakout higher.
Very quickly, you gave yourself some half-ass assurance:
“I’m sure I can make a quick profit, in and out, that’s it.”
And there you go.
You jumped straight into the trade, without even blinking.
What happens next?
Your account gets whooped up, without blinking as well.
Does this sound familiar?
Well, then it’s time for you to do something about it!
Tune in to this episode to understand how pros trade breakouts.
Here’s what you’ll learn:
- This fatal mistake to avoid so you don’t get caught in a false breakout
- 2 high probability techniques to trading breakouts to increase your profitability
So tune in to it right now…
Hey hey, what’s up my friend!
In today’s episode, we’ll be discussing how to avoid a false breakout.
I know it hurts to be always getting caught in a false breakout.
So let’s talk about this.
The fatal mistake to avoid when trading breakouts
Here’s the thing…
Whenever the market breaks out higher, there’s always this thing in you that tells you:
“It’s time to buy, buy, buy, buy my friend!”
And then you buy.
The next thing you know, the market reverses and you get stopped out.
The lesson here is that whenever you notice the market making a huge break out with strong and bullish candles…
It probably means it’s too late to enter the trade. Here’s why…
When you buy after the market has made such a huge move in a short period of time, the first thing is there’s no logical place to put your stop loss.
If you have to set a proper stop loss, you’ve got to look left and realize that the previous swing low is so far away.
There’s no logical place to put your stop loss because the nearest market structure is so far away from your entry price!
You’re probably thinking…
“But Rayner, the price is going higher!”
“I should just get on board the trade and quickly exit for a quick profit!”
Yep, that’s their mindset, or rather that’s my mindset previously when I was trading in my early years.
So where would you put your stop loss?
They know risk management, they know how to put a stop loss, so what they’ll do is to set their stop loss at any random level.
Maybe 50 pips away from the entry. Or maybe $2 to $3 away from their entry if they’re trading stocks.
And then what happens?
Well, after the market made such a huge wave up higher…
It needs to pause, it needs to retrace. So the market pulls back and it eats their stop loss.
Then they wonder:
“Man, why does this always happen to me!”
That’s because you set your stop loss at a ridiculous level when you’re chasing the markets!
This is how traders get caught on a false breakout – they keep chasing the market.
So now, what should you do then?
How should you trade breakouts then?
Well, I got a couple of tips for you…
Wait for the market to show you signs of strength
What do I mean by this?
Let’s say you want to buy the breakout and you’re targeting the resistance level.
Don’t just buy the breakout out of resistance, because not all breakouts are created equal.
The types of high probability breakouts that you want to trade are those that show you a sign of strength.
For example, a series of higher lows coming into resistance.
It will look something like an ascending triangle.
Imagine that the price is approaching resistance.
But every time it bounces away it forms a new higher high repeatedly.
You can imagine that there is this coil forming near resistance.
This tells you that buyers are willing to buy at these higher prices!
But this coil cannot hold on forever.
So what usually happens is that the price breaks out higher as the buyers keep coming in.
This is the type of breakout trades that you want to trade.
It’s what I call a sign of strength.
I’m looking to buy the breakout of resistance, and I’m looking for higher lows into resistance.
Trade management (signs of strength)
And if you think about this, your stop loss now can just be below the previous swing low.
You can actually connect the lows together and form somewhat of a trendline.
And you can set your stop loss below this trendline.
So if you don’t chase the market, and instead let the market show you signs of strength…
You‘ll have a logical place to set your stop loss.
Now, the second technique I want to share with you is what I call a…
Trade breakouts with a buildup
A buildup is basically a tight consolidation that you see on your charts.
So often traders ask me:
“Hey Rayner, how many candles are in a buildup man?”
It’s pretty hard to give a number.
But if you really want to put a gun in my head and ask me, I would say look for at least a 10-candle buildup.
If you see a buildup at resistance, this tells you is that the buyers are willing to buy at these higher prices.
Because they know that the price is at resistance, which is an area where sellers technically should be around to push the price down lower.
But if you see a build-up at resistance, this is telling you that buyers are willing to buy at these higher prices and this again is a sign of strength.
Trade management (breakout with a buildup)
And when you look for a buildup to form, you can now set your stop loss below the lows of a buildup.
You now have a reference point that you can use to set your stop loss.
Another quick tip for you is that if you want to trade buildups…
What I realized is that the market can really go in either direction, up or down.
But if you are trading in an uptrend, price is at resistance, and there’s a buildup formed…
The price often breaks out higher as well.
You also want to take into consideration the trends of the market is that you’re in.
These are a couple of techniques that you can use to avoid false breakout I hope it helps.
With that said, I have come towards the end of today’s episode.