Breakout Trading Strategy & Breakout Strength

Breakout trading strategies are a method highly effective for crypto trading due to their ease of application. However, it can be tricky for traders to read the right signals as this strategy can be susceptible to false movements and volatility. Overcoming false signals is possible with the right setups of tools and concepts aligned with the basis of the breakout trading strategy. 

Through the following sections we will try to comprehend how breakouts work, pointing out some advantages and disadvantages, and we will give demonstrations of how using price action, technical indicators, and timeframes could help traders measure breakout strength.

How Do Breakouts Work?

A price breakout is a sign of a potential trend shift or continuation in the up or down direction of a crypto asset. This type of movement in the market is based on the surpassing of relevant price levels like  support and resistance.

During a trend when the price reaches a resistance or support zone, breakout traders could expect some possible scenarios:

1. Downtrend: The price reverses from the support zone or breaks through it. In the first case, the market will indicate a trend shift. In the second case, the market will indicate continuation.
2. Uptrend: The price reverses from the resistance zone or breaks through it. In the first case, the market will indicate a trend shift. In the second case, the market will indicate continuation.

Generally, chart patterns like head and shoulders and ascending or descending triangles are analyzed by breakout traders when they are detecting an opportunity. These patterns are common in uptrends and downtrends.

Another market condition where breakouts take place is during ranging markets. A range is a type of market season that accumulates some liquidity around repeated resistance and support formations that the price reaches several times until it breaks out from it.

Why trade a crypto breakout?

Breakout strategies are attractive for their simplicity and effectiveness, helping traders approach markets in an easy way. However, breakouts come with some pitfalls like false breakouts, which are very common along with abundant misleading signals.

Despite the pitfalls, this is a good strategy for all types of traders at any level. As a concept, breakouts could serve as a viewpoint for a broader analysis of the market sentiment when they occur in very relevant zones.

When traders master breakouts and properly measure them to avoid misleading signals, they for sure will carry with them an effective receipt to take advantage of fast price movements when a price level is broken.

Advantages

1. Breakouts could lead to speedy and directional price changes, helping traders to capitalize rapidly on a position.
2. The simplicity of this strategy could help develop an effective trading plan, allowing traders a consistent application.

Disadvantages

1. Breakouts are susceptible to volatility, resulting in false breakouts.
2. False breakouts can be caused by institutional traders intentionally to mislead traders. 

How to Measure Breakout Strength?

Measuring breakouts will require some advanced techniques for the proper recognition of the best setups and candlestick patterns while reading indicators or conducting different time frame analyses.

Price action concepts and technical indicators like volume or RSI might play a substantial role in confirming a breakout signal.

Price Action Analysis

The analysis of price action will measure the decisiveness of the breakout. For example:

1. Patterns like engulfing candlesticks, when the size of the candle is notably superior to all previous candles, will suggest strengthening in the direction of the breakout.
2. After a breakout, even when candles are not notably high in size but there is a sustained price movement, it might suggest the contrary side at that level is not strong enough to resist the breakout move.

Timeframe Analysis:

Analyzing different time frames will measure the weight of a breakout for the overall market trend. For example:

1. The analysis of a breakout in a daily chart will help confirm a broader market sentiment as the daily chart is used for long-term trading strategies.
2. In other cases, the analysis of a breakout in an hourly chart could help detect a shorter price swing between a larger trading range.
3. The confluence of breakout in a shorter time frame aligning with the trend in a longer time frame can validate the breakout signal with high accuracy.

Breakout with Volume

Indicators To Measure Breakouts

Factors Influencing Breakout Strength

Other important factors to consider when measuring breakouts are:

• Supply and demand: both can be measured by the size of the candles following a breakout.
• Liquidity levels: this can be measured by the surging in volume during the breakout.

Example of Measuring Breakout

Conclusion and Call to Action

Measuring breakouts is essential for the success of this strategy. Breakouts can be a simple approach to the markets, but it is that simplicity that makes this trading method a target of misleading signals.

Breakout traders can still reach high effectiveness on their strategy when taking into consideration multiple confluences of factors for the breakout analysis like different timeframes, candle sizes and patterns, or indicators like Relative Strength Index and Volume.

In the ultimate instance, breakouts will give insights into market sentiment. You can give this strategy a try by signing up for a free trial on Altrady and start paper trading Breakouts in crypto markets along with a wide range of technical indicators.