The danger in using breakouts in trading

One of the most popular ways of trading the financial markets is by using breakouts, in other words those moments when the price goes beyond a range where it has been trading recently.

The old classics of trading spoke about breakouts like Jesse Livermore, who used to say that one of the best ways of trading was when breakouts took place.

Other case where the mention of breakouts was explicit was that of Bruce Kovner who used to tell his traders to let him know of any occasion in which a Forex exotic par had broken some important range after years. Apparently it used to be a very profitable trade.

Breakouts trading

If we read Livermore works we may think that the key to trading is waiting for breakouts to occur.

The problem is that the majority of traders who try that will eventually fail as well.

Why do they fail?

Because the majority of traders try to implement such strategy in the day trading markets.

As we should know there are periods of days, weeks and months where there are lots of false breakouts. So many that makes the strategy a disaster.

a short-term chart in any market

This can happen with 5, 15 or 60 minutes charts quite consistently.

Eventually, most of those short-term traders end up being knocked out.

If we notice what traders like Livermore or Kovner said, it was not day trading where we should put this strategy into practice but longer timeframes; something like breakouts after years or many months.

Long-term breakouts provide better and more realistic opportunities

Experience tells me that using long-term charts is the right way of trying to trade breakouts. This has to be done searching for big profits as well because when a long-term breakout occurs it is likely that it is a big movement.

With this in mind you should know that you you are not going to win 200% a year using day trading breakout strategies.

Trading is a bit more boring than that.