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icoman

Breakout trading strategy

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This is a step by step guide through the breakout trading strategy for cryptocurrencies. This happens to be one of my favorite trade set-ups. Ever since 2015, I’ve been involved in trading and investing in cryptocurrencies, and has gained much knowledge in these markets, thereby knowing what works and what doesn’t work.

 

 

Major goal in trading cryptocurrency: Trade less and Profit more

Major reason why several traders are not successful, is that they over trade. The only time you want to take a trade is when you are rest assured or having a high probability that the trade wins and you could also formulate a trade that works in your favour, but the truth is that, most of these opportunities hardly come on a daily basis.

This article shows the various strategies and methodologies that explains how you could wait patiently for those really big home run trades and ignoring everything else.

 

Day trading and swing trading

If day trading entails buying and selling something within a day, you might make hundreds of day trades in a day or just one and you might hold it for a few minutes or hours, but day trading entails getting in and out of a position in one day, when swing trading takes a longer time frame (few weeks or even up to 3 months and more). My profit target and goal for every trade is 30% or more gains in the market; this depends on volatility but the idea behind this is taking fewer trades and searching for bigger moves.

 

Benefits of swing trading.

  • You have the chance of catching bigger price moves.
  • You are less likely to get shaken out of a trade.
  • You are less likely to make mistakes, because you will have fewer trades. 
  • You come to spend less time working with your computer.
  • You have more time to focus on other activities that could yield more income.

 

Why breakout trades?

Specifically for new and inexperienced traders, 

  • It gives you clear entry areas.
  • Its risk management is much easier then buying into falling knives (image bellow, rush of emotions like "is this the right moment to buy").

 

bitcoin-falling-knife.png.38bcb73d680177921ad424f47fe9f9a9.png

 

 

 

What is a breakout trade?

  • It starts with a clear trend - You're trading with a trend, it starts with a clear direction in the market.
  • Next, is the consolidation period - Where the market could go sideways.
  • Price successfully breaks through a resistance level - This brings about a cascade effect of buying activity; it encourages more buying and this also has to do with timing.

 

Why big breakouts happen?

Breakouts can be easily seen on charts. But our focus is on people, because people and computers are what drives price; it is the action of all type of traders (individuals, investors and bot algorithms), it doesn’t just happen. What happens to people during a breakout?

  • When price breaks to resistance level, some people see the breakout and buy the resistance level
  • Short positions needs to be closed up, which means they need to buy, which results in a higher buying momentum.
  • Potential sellers pull orders.
  • Trader’s loss to the breakout leads to an increased price

 

Note here: Not all breakouts work. You can find breakouts all over, but spot breakouts you feel has a greater probability of leading in a "big move" in price.

 

The 1234 breakout pattern

This is the technical analysis of breakouts in just 4 steps, shown in the image bellow:

  1. Start with a run in price that sets the trend direction.
  2. Then comes the pullback in price, you will see price come down slowly typically on lower trading volume.
  3. Look for price to consolidate and eventually retest the resistance level. The key note here is that, the longer the consolidation period, the bigger the breakout
  4. This is where you break the resistance area on high trading volume.

 

1234pattern.png.e269d8ae69f5ae8fb026f95e9e879703.png

 

 

News Catalysts

There are several other factors that can increase the probability of a breakout working. One of those factors is a News catalyst. News catalyst has to do with any kind of news event that surfaces during the breakout or actually caused the breakout to occur or a little period after the breakout. It helps in increasing the probability of making the breakout go much further. Some of these events include:

  • Blockchain coming out with a development announcement that they came out with an update or rebranding or entirely something new that can boost the investors interest.
  • An entrepreneur backing a crypto asset. 
  • Some information about adoption rates rising.
  • Some positive government relations. 

 

 

Risk Management is Everything

Trading has a lot to do with risk management. Below are just three things to note when restructuring your trading plans

 

Stops

If you get in a trade and it goes against you, where do you stake a stop loss? You definitely going to have small losses and small wins, you could also have big wins, but a trader should never take a massive loss. 

 

Position size

This has to do with how much capital are you willing to risk and potentially lose in this trade?

 

Profit targets

Where will you close either part or the entire trade if it does work?

 

 

To conclude, I will say that, the goal is not to trade everyday, trade less, look for the bigger moves and have more time to do other things.

 

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Thank you for this post. I'm buying when it drops but my problem is that I go in  too soon. I'll study this, thanks again! 

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