Have you ever found breakout trades to be kind of nonsense?
I mean, the price forms a very nice resistance, and you think when the price breaks above it, it will gain higher upward momentum and will continue more in the upward direction.
So you gather all your strength and take a long trade at the breakout, risking your hard-earned money.
But the price decides to reverse.
The breakout fails, and your stop-loss is triggered.
The price says, “No money for you, go get a job.”
Well, this has happened to me many times in my around nine years of trading, and I know it happens to you as well.
I know you face false breakouts because I literally have tested data that says around 60% of the time, the breakout is going to fail.
But the thing is, this data is only for range market breakouts.
Trend market and similar strong momentum market breakouts will have a much better probability of working.
Well, this is because the price has a much higher probability of moving further in the direction of the strong trend or momentum.
But trend breakouts have a catch, too.
Based on the trend breakout testing data we have seen on the main Trading Rush channel, whether you will make money or not will also depends on where you set the stoploss in a trend breakout trade.
Basically, data says range breakouts suck most of the time.
And trend breakouts are kind of annoying to trade.
Well, what in the world can we do then if both kinds of breakouts suck?
What in the world can we trade?
Well, we do have data that says buying after the retest will have a much higher probability of making money.
Like, the price is now more likely to move in the breakout direction.
But is it really a better idea?
Like, is buying after a retest of the breakout level actually good?
I mean, even if we ignore the tested data, it’s not that bad of an idea.
Like, before the breakout, the price was in a range.
So this breakout level was a resistance.
And when the price gives a breakout above this resistance, there can still be some selling pressure.
If the selling pressure is higher, the price moves down even after the breakout, and the breakout fails.
But if the buying pressure is higher, then the price moves in the upward direction.
But since we don’t know if the buying or selling pressure is higher at the breakout candle, it’s kind of a bad entry.
We don’t have enough info to risk our hard-earned money.
But when the price makes a small upward move and then moves down towards that breakout resistance area, that area can now act as a potential support.
I mean, we don’t know for sure that it will act as support.
We just hope that the price will react from it in an upward direction.
If the price doesn’t react from it, like it doesn’t get strong green candles, then we simply don’t buy.
We see it as a failed retest.
Like, if the price moves down, down, down, the breakout has failed completely.
But when the price comes back to that resistance area and we see a green candle that is stronger than the red candle, or we see the momentum in the upward direction getting stronger (like with the MACD indicator or something), then we can say that the resistance is now acting as a support.
So in this example, we see a green engulfing candle that is clearly stronger than the red candles, and it is near the potential support area.
So we can take a long trade when the candle closes and then set the stop-loss on the opposite side of the support area, something like this.
Now, the interesting thing is, if we look at the price pattern before, it was a zigzag pattern in the same place, which is the range pattern.
But then it made an upward move, then it gave a pullback, and now it’s starting to make the continuation of the upward move.
Basically, now this upward move, smaller pullback, and then a return to the upward move looks like a price action uptrend pattern.
So basically, when you take a trade at the retest of the breakout, you are not only taking the breakout trade, but you are also taking a price action trend trade.
You are taking a trade at the pullback of the trend, but things get even better because now you are also buying at the support level.
If you had directly bought at the breakout candle, then you would be buying at the resistance.
You were taking a long trade at the selling pressure point, which is a bad-quality setup.
But when you wait for a retest, which according to data has a higher probability of working, you are taking a trade where three things are saying the price has a higher probability of moving in the upward direction.
The first is the upward price action pattern.
The second is the support, and the third is the retest of the breakout, which, according to data, has a higher probability of working.
But to top it all off, in a trend, you are not supposed to buy at the top of the trend.
You are supposed to buy low and sell high.
If you had taken a trade at the breakout candle directly, then you would basically be buying at the top.
But after the retest, you are buying at the bottom of the pullback.
You are buying low.
That is a much better quality trade.
Now, since you have multiple things saying the price has a higher probability of moving in the entry direction, you can set the profit target wherever you think the price can reverse from or has the potential to reverse from.
For example, even though it is now a trend-like pattern, the highest point of the trend—which in this case is this point, the swing high of the uptrend—can act as a weak resistance.
In other words, the price has the potential to reverse from that point.
So you can set the profit target before it.
Or, if you like to use a fixed reward-to-risk ratio like one-to-one or 1.5-to-one, then you can set the profit target using that as well.
And if you think the price will make a much stronger move in the upward direction, maybe because there is some kind of news or something, or something is making the price move strongly in the upward direction, then you can set an even bigger profit target.
It depends on the setup, but basically, according to data, don’t buy at the breakout of the range immediately.
Instead, buy at the retest where multiple things are saying the price has a higher probability of moving in the entry direction.
Plus, you also get a good place to set the stop-loss, which is below the pullback, below the support.
That’s all. Thanks for watching.