Want to learn how to trade breakouts properly? Read this article and never get caught up in the false breakout again.
Want to learn how to trade breakouts properly? Read this article and never get caught up in the false breakout again.
In this article, we’ll look at breakout trading.
Firstly, let’s properly define a breakout. As we know from the Auction Theory, the market is always looking to establish a fair price – a level where buyers and sellers are evenly matched or balanced. In order for a breakout to happen, one side must start dominating the other.
Let’s look at the practical example on the EUR/AUD chart from April 22, 2024.
We can see that on April 21, buyers and sellers were evenly matched – transacting inside the AOI zone. Candles are changing color around the DFP which clearly shows us that buying and selling side of the market is happy to transact around these prices. It becomes interesting later on in the day, when market tries to breakout above the AOIH level – remember, this is a first sign of a breakout and if we’re going high then the buyers should be in control. This was not the case as candles we’re printing red – this has shown us that sellers are still in control and this is most likely a false breakout.
This is exactly what happened and due to the sellers being in control – market has returned back to it’s fair price inside the AOI. This is how 75 Cygni Algorithm would prevent us from making a bad decision trading long on a false breakout.
On the next day however, we have the exact same situation in terms of price – we’re breaking above the AOIH. But there’s a major difference to be seen this time – CANDLES ARE PRINTING GREEN, which shows us that buyers are in control. This is a clear sign of a breakout taking place and longs are in play! We could trade this with SL below AOIH or simply below the breakout candle.
Let’s look at what happened next.
A strong push above the AOIH, leaving sellers overpowered by the buyers. The sellers had to take their SL, which has turned them into buyers by buying back all their sell orders in loss – fueling the upside move even more.
This is how to properly trade breakouts and make sure you stay on the right side of the market by adapting to the market information.
Also, if you were late to the party and recognized a breakout a bit late – you can still scalp the move. Learn how to do that properly in this article: “SCALPING THE RIGHT WAY“
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