Trading Breakouts & Planning Exits

4 Okt 2017

BTCUSD
Over the past week BTC seems to have been developing a few interesting trends and based on the current chart with a one day time-frame I want to discuss one of the most evident patterns that will be familiar to most and probably new to some.
In this case, we'll be talking about the triangle breakout which I believe to be in play at the moment, the last few legs before a potential breakout. For those unfamiliar with the term 'breakout', it is described as a stock price that moves outside a defined support or resistance level with increased volume. In most cases, a breakout trader would enter his/her long position after the price breaks above resistance or enters a short position after the price breaks below the previous clear support level. After the price trades beyond the threshold/barrier the volatility increases and prices will trend in favor of the direction of the breakout. In a lot of cases, trading breakouts is considered to be an important strategy because these points reveal themselves to be the starting points for major price trends. In this case, for the long run.

In the case of BTC we can see a triangle breakout that has been in play since the support level of $1800 during the month of July this year. A positive breakout then initiated with a slight reversal just before the beginning of the month of August. The price entered short term consolidation before the positive breakout that has resulted in so many happy traders who were lucky enough to buy in during the July dip. Even during the most recent dip when BTC retested $2900 levels, traders with long positions since July have remained profitable and I'm certain there's a few players who regretted jumping of the wagon when they got scared by dipping prices. Don't trade on impulse. I can't stress that enough. Quite a few folks have "gambler type" trading habits then wonder what is wrong with their trading strategy.

Regardless of the time frame, breakout trading is a really good tried and tested strategy that has proven itself over time. Whether you work on intraday, daily or weekly charts, the concepts are universal. When trading breakouts the most important factor to look out for would be the support and resistance levels that have been tested and retested. The more these areas are retested, the more valid and important these areas become.
Entry points on these trades will mostly be determined by said support and resistance levels. When the prices closes above a previous resistance level, a trader will choose to establish a bullish position & vice versa. Be careful of "fake outs." They mimick breakouts and tend to trap most young traders/investors trading on impulse. Wait for confirmation of the breakout. A candlestick breaking a little past your entry point doesn't always mean you're good to go. It could result in an end-of-day reversal that sees the price trend reverse. Very evident in our BTC chart.
Point (b) on the chart seems to be a repetition of point (a). In the past, we can see that at point (a) we experienced a short term break past the 0.786 retracement level before a resistance reversal which saw the price find support at the 0.618 retracement level and the bulls saw the price through to $5000. Based on the short lived bearish trend at point (a) tells us a lot of bearish traders were caught in the headlights when the price turned around and went for 5K all within the span of 6 days. If an investor acts too quickly or without valid confirmation there is no guarantee that prices will continue into new pre-defined territory.

4 Okt 2017

Catatan

Planning your exit is where predetermination comes into play. The most important plans to arrange would be to evaluate where to exit with a profit, where to exit with a loss & where to set a stop order. A look at BTC recent behavior would determine a reasonable objective. Using the most recent price action to determine a price target. For example an idea would be to calculate recent price swings and average them out to get an approximation on your price target.
Knowing when a trade has failed is quickly evident when trading breakouts because the trend reveals itself. After a significant breakout, old resistance levels tend to act as new support levels and old support levels become the new resistance points. This is an important way to determine where to set your stop-loss order with confidence.
If the current BTC price were to enter short term consolidation before a positive breakout, my stop-loss order would be set for approx $3500 allowing for enough wiggle room during minor price fluctuations before my long term goal is achieved. A piece of advice here would be to mention that you should never really give a loss too much room so confidence in your prediction is desired in such a case.
After a position has been taken, use the old support & resistance levels as a line in the sand to close out a losing trade.