On an invented price path, the price sits in a narrow band, pokes out and falls straight back, and later leaves the band for good, with a trade at each new high or low: 6 trades are marked, 4 closed ahead and 2 closed behind.
A triangle marks where a trade opens and points the way it was taken. A green dot is a trade closed ahead, a red dot one closed behind. The path was invented to show how the approach behaves, including where it goes wrong. It is not market data and it proves nothing.
Also searched asbreakout strategy · channel breakout · range breakout · false breakout · trading new highs
A description, not a recommendation
This is a description of an approach people use. It is not a recommendation. No approach works in every market, nothing here has been shown to be profitable, and the chart is invented.
The idea
A breakout is a price leaving the range it has held for some time. The approach buys a new high or sells a new low, on the reasoning that a price which has gone further than at any point in the recent past may be starting a larger move. It is a way of joining a trend at its first sign, and it accepts being wrong often in exchange for being present when a large move begins.
Usually heldDays to weeks · others held about as long
The rule, as people usually state it
As usually stated: go long when a bar closes above the highest high of the last 20 bars, and short when it closes below their lowest low. The stop is a set distance away, often a multiple of the average range, and the trade is closed when the price makes a shorter-term extreme the other way, such as a 10-bar low. The numbers vary; the shape of the rule does not.
What it needs from a market
- Markets that, some of the time, leave a range and keep going.
- A stop wide enough to survive the return to the edge of the range that often follows a break.
- Enough capital and patience to take many small losses between the few large gains.
What it costs
Moderate. With a 20-bar look-back a market gives a signal every few weeks on a daily chart, more often on shorter charts. Two things add to the spread. A breakout is bought at a high, the moment when others are buying too, so slippage on entry is common. And because most breaks fail, the spread is paid many times on trades that return little or nothing.
When it fails
- In a sideways market: the price pokes above the range, triggers the entry and falls back inside. This is the false breakout, and it is the usual case, not the exception.
- When a level is watched by many: the price is pushed just beyond it, orders are filled, and it reverses.
- After a gap: the break happens between two bars and the entry is far from the level.
The mistakes people make with it
- Shortening the look-back until the past looks good. A rule tuned to one stretch of prices has been fitted to it.
- Entering before the bar has closed. A break during a bar is often gone by its end.
- Placing the stop just inside the range, where the ordinary return to the edge reaches it.
- Giving up after a run of losses, shortly before the one trade the approach depends on.
In the rule bench
Long on a close above the highest high of the last 20 bars, short below their lowest low, a stop 2 average ranges away, no target, 1% at risk, on the example index.
The bench uses invented random prices, on which no rule has an edge, so it shows how the rule behaves and what it costs, not whether it works.
Questions people ask
- Does breakout trading work?
- Nothing on this page shows that it is. The page describes what people do and why. Published research on trading rules is mixed, results that looked good in one period have often faded in the next, and costs remove much of what remains. The loss figures that regulators require firms to publish show that most retail accounts trading CFDs lose money.
- What is a false breakout?
- A move beyond a level that does not continue: the price closes outside the range, or only trades there briefly, and then returns inside. It is the most common outcome of a break, which is why the approach has a low share of winning trades.
- What look-back period is used for a breakout?
- Twenty bars is the figure most often quoted, with fifty-five and a hundred also common. A longer look-back gives fewer signals and fewer false ones, and enters later. No setting is correct; each is a different trade-off.
The words on this page
An explanation for study. It is not advice, a recommendation or a forecast. This is a description of an approach people use. It is not a recommendation. No approach works in every market, nothing here has been shown to be profitable, and the chart is invented.