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Yes, Give it to me

How to identify high probability breakout trades 

Last Updated: August 18, 2020

By Rayner

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In today’s episode, you’ll discover how to identify high probability breakout trades (and bring your trading to the next level).

So listen to it in now…

Resources

The Complete Guide to Breakout Trading

The 200 Day Moving Average Strategy Guide

Transcript

Hey, hey, what’s up my friend?

In today’s episode, I want to share with you on how you can go about finding high probability breakout trades.

In essence, what I’m about to share with you, are the things I look for to find the best of the best, the highest of the highest probability breakout trades. And I’ll be honest, sometimes you just can’t get all the stars to align.

But if you can get as many of these stars to align, you’re pretty much in good shape. So here are the things I look for.

1. You want that market to be at all-time highs

It doesn’t matter if you’re trading stocks or whether you’re trading currencies or whatsoever, you want that instrument to be trading at all-time highs.

I think this is something common for stocks. This is because if a stock is trading at all-time highs, this means that the stock is pretty darn bullish. There’s little to no selling pressure. People are just flying on board, wanting to get a piece of the action of that particular stock.

And here’s the thing about buying stocks or any other instruments that are trading at all-time highs, there is no price structure where sellers can lean against to short the markets.

Let me explain what this means. So if a stock let’s say is trading at all-time highs, if you look to the left, I can assure you that there is no swing high and no resistance where the sellers can use to time their short entries because the stock is at all-time highs.

Unlike a stock that’s approaching resistance and about to breakout. If you look left, there might be resistance or a swing high. But for a stock that is trading an all-time high, there is no such thing and it’s really sweet to be a buyer for such stocks and to look for breakout opportunities when a stock is trading an all-time high.

2. You want that particular stock to have a high rate of change

Let’s say over the past 12 months, you have two stocks: Stock A has increased 30% in price, while Stock B has increased 100% in price. Which stock do you want to be buying? I hope you choose Stock B you want to be buying stocks that have moved a lot recently.

Because these are the stocks that are likely to continue outperforming the market. So one simple way is to just look at the rate of change or the percentage change over the last 6 to 12 months.

Those that have moved the most during those periods are the ones likely to outperform the market.

3. You want to have the range before the breakout be at least 80 candles or more

If you are trading on the daily timeframe, that means the market has been in the range for at least 80 days or more.

The reason for this is quite simple. Based on my experience, the longer the market is in a range, the harder it tends to break. What happens is that traders who notice the range will look to buy low, sell high, buy support and sell resistance.

And when you buy support and sell resistance at the ends of the range, it will accumulate more stop orders. Let me explain.

Let’s say you buy at support, where will you put your stop loss? I’m guessing you’ll put your stop loss at or below the lows of support.

And if you think about this, someone who is long at support, their stop loss is in essence, a sell stop order. So if the market goes against them, it hits their stop loss, that’s a sell order to get them out of their long position.

Likewise, if you’re selling at resistance, your stop loss is probably above the highs of resistance. And if you’re shorting the market and you want to get off the trade, you need to buy back what you’ve short sell earlier. So that’s a buy stop order above the highs of resistance.

So the longer that the market is in a range, the more these stop orders will accumulate above the highs of resistance and the lows of support. And when the market eventually breaks out of the range, it could be fast and furious because many traders rush to exit.

This will push the price much further beyond the breakout point. On top of it, momentum traders will join in the party and this could even push the price much further.

So the longer the market is in range, the harder it breaks. That’s why I look for a range that’s at least 80 candles or more when I’m trading breakouts.

4. Wait for a buildup

Here’s the thing, before the market breaks out, you want it to form a buildup. Some traders call it a tight consolidation, some traders call it a volatility contraction.

So when the market is in a range, and let’s say it approaches resistance you want it to consolidate at the highs of resistance. There are a couple of reasons for this.

Reason #1: It’s a sign of strength

It tells you that buyers are willing to buy at these higher prices. That’s why you have this consolidation at resistance.

Reason #2: There is a point of reference to set your stop loss

When there is a consolidation at the highs of resistance there’s a reference point, which is the lows of the consolidation, where you can set your stop loss.

Imagine two range markets, one range market is where the price simply just goes up, down, up, down. Then if you buy the breakout of resistance, where is the logical place to set your stop loss, possibly below the lows of support?

The second range market also moves up and down, but this time around, it forms a buildup at the highs of resistance. If the market breaks out, where can you put your stop loss?

Well, you don’t necessarily have to put it below the lows of support because you can just set it below the lows of the consolidation, below the lows of the buildup. This gives you a tighter stop loss which improves your risk to reward on the trade.

This is why the fourth thing you want to look for is a buildup.

5. Make sure the market is trading above the 200-day moving average

This is to make sure that you’re buying in a long term uptrend. But if you follow the earlier tips that I’ve shared with you, most likely that market will also be above the 200-day moving average.

But I just want to put this here to make sure I don’t miss it as well.

Recap

So here are the five things to look for to identify high probability breakout trades:

  1. The market is trading at all-time highs.
  2. The stock exhibits strong momentum over the last 6 to 12 month, with a high rate of change value. The larger the price increase the better.
  3. Look for a range that’s at least 80 candles or more – if you’re trading on the daily timeframe, that’s 80 days. If you’re on the weekly timeframe, that’s 80 weeks.
  4. Breakout with a buildup – look for a tight consolidation before the breakout.
  5. The market is in a long term uptrend above the 200-day moving average.

With that said, I have come to the end of this episode and I’ll see you in the next.

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