Spread Betting Strategies
Breakout trading is one of many spread betting strategies, teaching how to minimize risks and capture significant price moves before most of the spread betting market is even aware of this trend.
Spread Betting Strategies
Introduction to Breakout Trading Strategy
Breakout trading is a Spread Betting strategy used by active traders to identify trend waves in their earliest phases. Typically, the signals for breakout trades occur when volatility increases with prices rising above (or falling below) their historical ranges. Using proper money management techniques, breakout traders are able to limit risk and capture significant price moves before most of the spread betting market is even aware of the newly developing trend. Here we will look at the specific steps involved when setting trade entries, stop loss levels and profit targets in creating favorable risk to reward ratios using breakout signals.
Definition of a Breakout Trade
A breakout is what occurs when stock prices (or prices for any other asset class) exceed previously determined support or resistance levels. Long positions are triggered when prices move above resistance, while short positions are signaled when prices drop below a clearly defined level of support. Since these breaks are uncommon (and usually unexpected) Spread Betting markets are typically caught off-guard by the price activity and, as a result, volatility will generally increase. Another reason for this increase is that traders with range trading strategies often have stop losses just outside of the commonly defined range, and when the break out triggers these stop losses, prices have the potential to gain momentum in the direction of the break.
It should be noted that breakouts can occur on any time frame but those seen on the longer term charts tend to create more significant changes in momentum and volatility (which suggests a higher level of forecasting ability and successful trading). The same rules apply on any chart time frame but breakouts seen on a daily or monthly basis generally have a higher probability of showing a true change in underlying trends (which suggests a higher level of validity in the breakout price movement).
Additional Factors Spread Betters Should Consider
The key to successful breakout trading is seeing follow-through (or a continuation) of price activity in the direction of the break (a break of resistance for a long trade, a break of support for a short trade). Without this momentum, prices will reverse and stop us out of our position. So, how do Spread Betters determine the best support and resistance levels to watch? The answer can often be seen in the number of times the level (either support or resistance) has been tested in the past.
For example, a “double bottom” is an area where prices have seen significant bounces on two different occasions. Essentially, the market has determined that prices should not fall below this level more than once. In the future, prices would be expected to be supported in this area if it was tested again (this expectation would be greater than if prices had only bounced from the area one time). It should also be said that this support level would be seen as even more valid if prices had bounced from there three times (a triple bottom).
Since many Spread Betting traders would be developing confidence in this level (in terms of its ability to support prices in the future), there would most likely be many long positions with stop losses just below the lows of this trading range. If this area does break to the downside at a later time, sell positions could be established by breakout traders, based on the assumption that the misplaced stop losses (established by range traders) will continue to fuel price activity to the downside. A trade of this type would aim to capitalize on the downward momentum created by these stop losses. Lastly, it should be remembered that the same logic would be applied for long positions, only in reverse, as trades would be triggered after breaks of commonly-watched resistance levels.