Trend trading still holds the position of the big brother in our trading community because it is the most popular approach. When the market exhibits a trend, it continuously breaks through various technical levels, which is why breakout trading is the most primary method within trend trading.

Many friends have been asking me about breakout trading, so today I will delve into the details, including the characteristics of breakout trading, three methods to enhance the advantages of breakout trading, and the two challenges faced by breakout trading.

There are many nuances worth examining. Achieving stable profits in trading is not about being smarter than others; it's about considering every detail and having exceptional execution. I believe those who have achieved stable profits will resonate more with this.

The article is quite lengthy, so I recommend bookmarking it for reading. If you find it valuable, please give the article a like. Thank you.

1. Characteristics of breakout trading.

Characteristic 1: Breakout trading is a part of trend trading, focusing on the continuation of trends.

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Breakout trading involves entering the market after the price breaks through a key level. It is a trend-following, right-side trade, where the core of profit lies in the continuation of the trend after the breakout. Therefore, one should choose opportunities where resistance is relatively weak or where the consolidation range has accumulated strong momentum for breakout trading. In both cases, the space for trend continuation after the break is significant.

Characteristic 2: Compared to pullback trading, breakout trading does not miss out on opportunities or trade against the trend.

The entry point for breakout trading is an inevitable path for the continuation of the trend. Entering the market after a breakout almost guarantees not missing out on trades, and the breakout itself is an entry in line with the trend, avoiding trading against it.Additionally, compared to counter-trend entries, which require identifying reversal points during a pullback (with unclear levels), breakout entries have a clearer and more objective entry point. As long as the market breaks through the price of a certain key level, one can enter the trade. Breakouts are clearly visible.

2. Three methods to enhance the advantages of breakout trading.

Method 1: Choose commodities with a significant edge.

Select commodities with strong trends for breakout trading. Breakout trading is based on a trend-following logic, so it is crucial to choose commodities with strong trends, such as gold, crude oil, and GBP/JPY in the forex market.

Choose commodities with fast movements, small pullbacks, and large spaces for breakout trading. If a commodity has the characteristics of fast movement and a large operating space, it can quickly create space after breaking out, detach from our entry cost, and quickly generate floating profits, making it the optimal choice for breakout trading.

Once a trade shows a floating profit, the psychological pressure is reduced, which is conducive to the execution of the trade.

Additionally, during the holding period, market pullbacks and profit give-backs are the biggest challenges for traders. Choosing commodities with small pullbacks is also key to successful breakout trading.

The British Pound against the US Dollar (GBP/USD) and the British Pound against the Japanese Yen (GBP/JPY), both being mainstream trading commodities in the pound series, have correlated trends, often rising and falling together. However, there are subtle differences in their intraday movements. Comparatively, GBP/JPY is more suitable for breakout trading.

As indicated by the red arrows in the chart, after breaking out, GBP/USD moved up by 130 pips, while GBP/JPY moved up by 350 pips after breaking out. The larger space in GBP/JPY is more conducive to profit-making.The trend indicated by the blue rectangle in the chart is a bullish trend, where the British pound against the US dollar has experienced a deep correction during its upward process, while the British pound against the Japanese yen has a minimal correction, and the market continues to rise. In a market that continues to rise with small corrections, it is more conducive to holding positions, making such a trend easier to trade.

Therefore, in comparison, when it comes to trading on breakouts, the British pound against the Japanese yen (GBP/JPY) performs better than the British pound against the US dollar (GBP/USD).

In futures trading, the main contracts usually have an advantage over non-main contracts for breakout trading. Additionally, commodities with higher trading volumes tend to exhibit stronger trends, faster movement, and smaller corrections compared to those with lower trading volumes.

Method 2: Choose large market patterns for breakouts.

There are many ways to conduct breakout trading, and any price break above a key level can be considered a breakout trade.

However, not all forms of breakout trading are equally efficient. Some breakouts lead to only a small price movement before reversing, while others quickly enter a new range-bound consolidation area.

Therefore, in practical trading, it is necessary to filter the patterns and opportunities for breakout trading, selecting those that may result in a large operating space and fast movement after the breakout.

Below, I will explain two patterns.

(1) Clear breakout pattern in a large time frame, enter on a smaller time frame.

When there is a clear breakout pattern in a large time frame, and the market in the large time frame is about to break or has already broken but with limited space, enter in the direction of the breakout on a smaller time frame, setting the stop loss at the high or low points of the smaller time frame.Once a major trend is established in the market cycle, the large trend will create a larger operating space and faster movement speed compared to the entry and stop-loss space of the smaller cycles, resulting in smaller pullbacks.

After a continuous rise in the left-side market, a double-top pattern was formed at the top, which broke down, leading the market into a period of consolidation. At this time, on the right side, a downward break consolidation pattern was formed at the 5-minute level. After the break, the entry and stop-loss space was 60 points, and then the market moved down by over 400 points, with a profit-to-loss ratio of 1:7, which is very reasonable.

If at the 1-hour level, the entry and stop-loss are set at the previous high, the stop-loss space would be over 120 points, and the profit-to-loss ratio would only be 1:3. For the same breakout opportunity, the profit-to-loss ratio differs by more than double, a significant difference.

By dissecting a breakout trading opportunity in this way, starting with small details, a larger profit-to-loss ratio can be achieved, thereby increasing the efficiency of trading.

(2) Choose opportunities after a washout.

Trading is a zero-sum game, a fight to the finish. Before the main force wants to lift the market, it often goes through a washout operation on retail investors. For example, the market may experience rapid rises and falls, V-shaped reversals, knocking out retail investors' stops, or in fast markets, causing retail investors to lose their rationality and close positions at a loss, or forming fake breakouts to lure longs and shorts, and then moving in the true direction, causing retail investors to lose money in the fake breakouts, and then taking positions at higher levels after the true direction emerges.

Therefore, we should also have a contrarian mindset, choosing entry opportunities after the main force has washed out the market. Such opportunities have a higher success rate, and after the break, the market moves quickly and has a large operating space, making them very worthwhile for trading.In the oval of Zhongda, the market first rose rapidly, then quickly suppressed and washed down. During the process of quickly suppressing and washing down, a fake breakout was formed at the same time, breaking through the horizontal support at 153.7, and then quickly rebounded, forming a V-shaped reversal.

After the washing ended, the market returned to the high position of the consolidation range and fluctuated again. At this time, the pattern of the washing was very obvious. After the washing ended, the opportunity to choose the market to break up was entered, and the market rose sharply.

There is a trading logic called "no washing, no trading". Although this approach is very patient, it is a very effective trading idea.

Imagine, should we wait for the washing with a cold eye, and then enter the market after others panic, becoming a follower of the trend.

In addition, there are indeed some varieties in actual combat, with a more "demon" trend, more washing and fake breakouts, such as crude oil, pound Japan, all belong to such varieties, which can be observed and paid attention to more in actual combat.

Method 3: Choose a recognizable breakthrough opportunity.

Breakthrough trading often needs to be combined with consolidation patterns, or trend line breaks, channel line breaks, etc.

These patterns often do not have a unified standard in trading, and there is subjective judgment. As a result, we often encounter some ambiguous patterns in actual combat. In this case, the difficulty of trading will increase, and many traders cannot find the accurate break point, so they reluctantly confirm.

The break point and stop loss point confirmed in this way are ambiguous, and this pattern is not suitable for trading.Therefore, in practical combat, we should choose a structurally standard pattern, select clear and explicit break points, stop-loss points, and clearly define our profit targets to ensure a clear trading standard.

Such patterns can leave one at a loss, unable to determine exactly where the market movement is considered to have broken through.

As I mentioned before, trading is a bit like falling in love, and so is trading break-out patterns.

A good break-out pattern must have a clear break point and a definite stop-loss point, just like someone who truly loves you will give you a clear answer and won't keep you hanging, making you anxious and uncertain. If we really encounter such a "bad girl pattern," let's quickly distance ourselves, as they usually lead to unfavorable outcomes.

Lastly, let's discuss the two major challenges of break-out trading.

The first challenge: regarding true and false breaks, false breaks cannot be identified and avoided in advance.

What troubles us the most in trading is the false break in break-out trades, and many people try every means to avoid false breaks in their trades.

From the unpredictability of the market and the underlying logic that profits and losses come from the same source, false breaks are fundamentally impossible to identify in advance and completely avoid.

A break-out trading system achieves profits by relying on the two most basic factors: the success rate and the risk-reward ratio.

If you are a break-out trader, we should still focus on refining the details of the trading system, trying to improve its success rate and risk-reward ratio, balancing these two aspects, and making them easy to execute, in order to achieve stable profits. We must not focus on avoiding false breaks, as that would be a dead end.The second challenge: Defining criteria for true and false breakouts.

True and false breakouts are abstract concepts that all traders must define for themselves.

For example, a breakout trader might define a false breakout as the market moving 50 points in the opposite direction after a breakout entry; whereas another trader might define a false breakout as the market moving 100 points in the opposite direction after a breakout entry.

In this pattern, the first trader defines a 50-point move as a false breakout, so this pattern is considered a false breakout for him. The second trader defines a 100-point move as a false breakout, so this trend is considered a true breakout for him.

Defining a true breakout follows the same logic. A breakout trader might define a true breakout as the market moving 50 points after a breakout entry, while another trader might define a true breakout as the market moving 100 points after a breakout entry.

The second trader defines a 100-point move as a true breakout, but if the pattern only moves 80 points, then for him, this pattern is a false breakout.

Why is it necessary to define criteria for true and false breakouts?

Only with well-defined criteria can we statistically analyze the profit-to-loss ratio and success rate of a breakout trading system, and determine whether this type of system is viable.

Without standards, after a review, one might feel that the success rate of the breakout trading system is quite high, but without clear standards, it's impossible to know exactly how high it is. When it comes to live trading, the system might fail, which is why many people struggle to succeed with breakout trading.

The methods I discussed today aim to refine breakout trading, improve trading efficiency, and enhance our execution. Do not underestimate these details; trading profits are made up of many small details. Whoever can execute them well will stand out.