Breakout trading means buying an asset after it has moved above a certain price level (and vice versa for selling). The breakouts can emerge on any time frames. The 5-minute and 15-minute charts are popular among day traders practicing breakout trading. The time of keeping open positions may vary from several seconds (breakout scalping) to day period.
The significant declines turn into extended patterns characterized by unsuccessful rallies and repeated testing of the previous lows. The nature of the market instrument changes because new consolidation of the price slowly shakes off the previous losing positions. The price is pushed to the top of the key resistance. The short-term relative force is improving, and the chart forms a number of the bullish price bars with the closing levels near their highs. Finally, the movement turns into a sustained breakout through the wall formed by previous failed attempts.
The market instrument has to overcome the counter force in order to enter a new upward trend. Traders, who are focused on the low price, build the foundation for the price increase. However, they fail to provide the key momentum necessary to accelerate the next price rally. Fortunately, the mass of traders chasing the momentum will come just in time to close the gap. Since the market instrument rises above the resistance level, traders who are betting on the price growth start trading all at the same time.
The gap that occurs at the breakout has a great buying opportunity. However, an experienced trader should proceed with caution if the movement is not accompanied by a large volume. The burst of traders’ enthusiasm attracts great attention that ensures further price movement. When the volume is insufficient, the gap can be filled very quickly and trap the emotional trader.
When there is no gap observed, large volume waves provide a convenient price level which is similar to the gap. However, the support can be more difficult to measure. Besides, more time can be required for the momentum to develop, forcing the price to fluctuate in a new range instead of a quick rise. Fortunately, this scenario also creates an opportunity for pullback trading because the support level can be advantageous for creating strong movements.
The uptrend faces expected barriers marked by the consolidations of the previous downward trend. These barriers cause frequent price falls that provide good buying opportunities. A trader should determine these profitable areas in advance. But it is also important to understand that these falls will disappear amid intense rallies. In this case, the price breaks through the previous resistance level as traders’ enthusiasm is growing.
During the upward trend, the main goal is to determine the target of the most expected movement. Since the trend creates momentum, both waves with and without gaps will be displayed on technical indicators such as MACD or ADX. Short pullbacks should not prevent the calculation of this emerging momentum. As the volatility absorbs each wave, the price should make a breakout on more powerful rallies. When this happens, the price range and volume will expand from bar to bar, often achieving the second gap’s high (continuation gap) at the final spike.