What are breakout trading strategies? Breakout trading strategies are a set of rules for trading range breakouts. A range breakout is defined as a breakout of a range of X number of bars where X can be any positive integer (whole number).

The term “range breakout” gets its name because a trade is triggered when the current price “breaks out” of a trading range. Let’s look at a few examples:

1 – Buy the QQQ if today’s high is higher than the highest high of the last 10 days

2 – Sell the QQQ if today’s low is lower than the lowest low of the last 10 days

Both of the above listed examples are examples of range breakouts. The top part of the “range” is the highest high of the last 10 days. The bottom part of the “range” is the lowest low of the last 10 days. This type of breakout is also known as a “channel breakout” because the top and bottom parts of the range form the boundaries of the “channel”.

The logic behind breakout trading is really quite simple. The typical interpretation is that if the market has enough momentum to break out of a trading range that it may be likely it will continue in the direction of the breakout. For instance, if today’s high is higher than the high the last 10 days then it is anticipated that the market is poised to move higher.

Another term you should become familiar with is known as a “false breakout”. A false breakout is one where the price breaks out, but does not continue in the direction of the breakout.

One simple way to trade a range breakout is to use the top portion of the range as your entry point and the bottom portion of your range as your exit point or vice versa. Let’s take a look using our previous example. We will imagine that today’s high has traveled higher than the highest high of the last 10 days. This means that we are now in a long trade. We place your stop loss at the bottom of the channel. This trade may go in our direction and prices may continue upward. If this trade does not go in our direction and is a false breakout then we will be stopped out at a loss when the price reaches the lower part of our channel.

Typically traders will use a price level that is slightly different than the exact price of the top or bottom of the range. For instance, if trading the QQQ a trader may choose to buy the market when the high reaches the highest high of the last 10 days plus $.050. Conversely that trader may choose to sell the market when the low reaches the lowest low of the last 10 days -$0.50. In our example $0.50 was an amount chosen at random simply for the purpose of illustration. Some traders use this particular method as a validation that prices are indeed moving in the desired direction and to minimize the potential for false breakouts. You can experiment with varying be amounts above and below the top and bottom channels to see which sets parameters work most effectively for you.

Breakout trading strategies can be incredibly effective. These strategies can be universally used in most any market and used with any timeframe as well.