Learn all about the Bounce And Breakout Trading Setup here and never miss another big move on your charts.
This technique is probably one of the simplest and most useful you will ever learn in Technical Analysis. It forms part of the Naked trading approach to Technical Analysis and it is very easy to learn which makes it perfect for people who are new to trading or who are looking to maximise profits. If that sounds like you then read on:
The only things that you really need for this Bounce And Breakout Trading Setup is a) a good broker with advanced charting, b) to be patient and wait for the opportunity to present itself and c) to identify the correct break out direction.
Here we will briefly explain the basics of this technique, but please be sure to do some back testing and check historical moves to determine if this trade setup suits you or not.
Bounce And Breakout Trading Setup
The Logic Behind The Bounce And Breakout Trading Setup
The Bounce is actually a process in which the price of an asset forms certain patterns. For more on Chart Patterns please check here. This chart pattens is generally a lateral formation, however, it can form in an upward or downward trending motion as a channel.
The chart pattern that is often referred to as a ranging market or as consolidation and will often come after a large movement in price as the market recalibrates where it stands now on price in relation to what Fundamentals have changed (usually which caused the initial move).
But if it is viewed at a shorter time frame it will often form patterns such as flags, pennants, and triangles (ascending/descending).
See more on Chart Patterns here on our related post Technical Analysis For Beginners.
What Is The Best Timeframe For Bounce And Breakout Trading Setup?
Before we continue, for those of you who are wondering if the timeframe is most suitable for this technique, it can be used usually on the H1 and H4 but it is also occasionally visible on the daily charts. This question will depend largely on what style of trader you are.
Stop-Loss and Take-Profit for Bounce And Breakout Trading Setup
For this technique it is best to set the stop loss some distance within the consolidation range that the asset was trading in before the breakout and pullback. For these calculations, please refer to the post on Risk Assessment and Management here.
For the take profit levels it largely depends on the asset and the trading conditions, also please refer to the Risk Calculations posts for further information on this.
Capital At Risk
This answer will depend on your leverage ratio, RRR, and Capital Risk appetite. For the specific calculations for these figures in your specific case please see the Risk Management Calculations sections here.
If it results that you have calculated to open a mini lot or a micro lot, then opening one position is fine. If you are calculating to open more than that you could opt to trade the value in 1 or 2 position entries.
The Bounce And Breakout Trading Setup
Part 1: The Bounce
The first thing you need to master is to identify the bounce condition on the charts. The appearance is as follows:
The Bounce is a sign of a market in a state of ‘indecision’ where there is no clear direction at that time. It is also known as the market trending sideways or being in a state of consolidation. It is an indication that there is due a breakout in the near future. So, in the eventuality of a breakout, you trade in the direction the price moves in.
Bounce is formed when the price fails to make a new high and a new low when it touches the support and resistnec levels.
This is what it tends to look like on a candlestick chart:
It seems fairly basic so lets continue on to the next section.
Part 2: The Breakout
After the period of consolidation, the next thing to happen is the breakout. A breakout is when the price finally exits the ranging motion or bounce zone.
It will appear like this:
Let’s see what that looks like on a chart as well:
Price breaks below and finally it dip quite far from the entry point which is the support level.
To confirm the breakout, the price must close outside the support / resistance zone. In many instances an asset will test these levels before mustering the momentum to actually break beyond them and hold the new trend.
When to enter the trade:
Th safest time to enter is to place a position on the second candle after the breakout has been confirmed by breaking out and closing out of the range levels.
The Bounce And Breakout Trading Setup Tips
This technique is very easy and simple to learn. If you are confident in the two main basics above you can definitely already master this technique. However, as always in trading the markets, there are a few things to look out for. Just because something looks easy, it doesn’t mean it’s really easy!
The main ‘enemy’ of break trading is false breakout. So let me share this technique in a pullback version.
An entry on a pullback is a safer way to enter this trade as it will help you get a good entry point to maximise profits while protecting yourself from the risk of a false breakout. If the chart actually creates a false breakout then you will be on a losing trade.
For that reason it is always safer to wait until the retracement or pullback has appeared, retested the support or resistance level (depending on which direction the breakout was in) and held that level post break on the same timeframe candle as you see the break set up on.
Wait for the retracement first then enter when the pullback candle is formed.
Identify the main point of the breakout and then wait for the price to retest the breakout area.
A pullback candle is a candle that closes following the breakout direction. In the picture above, the bullish candle is the pullback candle. Below is a bearish pullback example:
Observe the main trend in the picture before it starts to bounce. It is in a downtrend. When the price breaks support, wait for the retracement to occur then the sell entry when the pullback occurs.
Using Technical Indicators in The Bounce And Breakout Trading Setup
As this type of trading set up is a technique that does not require any indicators it is known as Naked Trading. This means effectively that you require nothing more than your own identified support and resistance levels to set up this trade.
For this reason it is a super trade set up to start with when you are a beginner trader as it is very easy to identify the setup entry points.
In order to add the defensive trading confirmation to this trade you would also use either Moving Average indicators for a Cross Over reading, or, you could use the Bollinger Band Indicator.
This will help to set up the closely related Bollinger Bounce and Bollinger Squeeze.
Please see here for more on the Bollinger Bounce and Bollinger squeeze.
Can I Enter The Breakout Trade Without Waiting For A Pullback?
The answer is yes, however it is far less safe to do so as you have not had confirmation of the trade. Check here for more on Defensive Trading Set Up.
Check out our other post for more Defensive Treading here.
As always, if you have any questions, we would love to hear from you in the comments box below. Happy trading!