Pros and cons of trading breakouts

by Vytautas Zilenas Blogger

Trading strategies abound in financial markets. Those that enjoy trading using technical analysis can find hundreds or maybe even thousands of free strategies that they could test on demo accounts and then adopt them and apply in trading with real money. Trading breakouts is probably one of the oldest and most practiced trading systems that one can think of. Let us look at some pros and cons of the system. Let us start with a positive note and discuss the positive aspects of the strategy.

The best part of the system is that ranges are usually small and trading them is pretty difficult. However, when those ranges are broken the price of a security moves decisively in one direction and money is easily made. It is difficult to make money in ranges, because prices too often move sideways and that is not a very good thing for those who want to trade a direction. This problem is solved when a breakout occurs. One does not have to understand fundamental part of trading by using this strategy. That is another advantage of the strategy. A trader can simply place orders outside both sides of the range (high and low) and wait for one side of the range to be broken. It is probably the easiest way to trade a breakout.

You do not need to think which direction the market will go. Just place a buy and sell stop order (above the range and below the range) and market will take care after the direction itself. Just follow the price and move your stops in the direction of the market. Exit it when you see that prices stopped moving and wait for another range and another breakout (if you only trade breakouts).

Now let us look at the negative aspect of the system. The biggest disadvantage of it is (in my opinion) that there are too many breakouts that end up as false ones. Ranges are broken and then prices come back where they were before the breakout occurred. This can be very frustrating as the event can be repeated quite a lot of times until a real break finally happens. To avoid big losses one should limit his risk by not risking more than one percent of his/her deposit. This is the only way to survive in any market as all strategies fail at some point (it does not matter how good they are). Fortunately, when a real breakout happens all the losses are usually wiped out and profits start growing.

So, I hope the article was useful and you will know how to trade breakout from now on. For more trading strategies visit website market trend and read articles: trading breakout, range trading and technical analysis.