A break-out strategy as the name implies is a strategy that relies on market price breaking out of a recent range area and making a new high or a new low. A break-out trader is looking for situations where volatility is reduced and the market price has formed a narrow trading channel or range; the aim of this search is to establish a position as soon as the market price leaves this range. Such a trader would be buying if price breaks out of the range in the upward direction and selling, if the break-out occurs in the downward direction.
A range is usually bound at the top by a resistance level, and below by a support level.
An example of a range or channel can be seen below.
The logic behind break-out trading is to take a position when either the resistance or support levels are broken, in the direction of the breach, on the assumption that price will continue to move in the direction of the breach.
So from the above screenshot, we would be looking to sell once the support level is broken.
The hardest part about trading break-outs is recognizing the range or channel, because what one trader might call a channel may not be a channel to another trader. So it is important to have cl…