How do we get good entries with breakout trading? Buying a full position after a breakout isn’t always optimal, as breakouts can fail.
The 4 types of buy points
Often, a market will go through a series of technical events before making a breakout. I like scaling in if/when those events occur:
Let’s look at an example using Bitcoin over the past 4 months. In June, it was clear that Bitcoin had formed a clear support level:
Then in late July, Bitcoin fell below that support level, before reversing higher a couple days later. This is called a failed breakdown, and it gave us our first entry at roughly $33K.
2 months later in late Sept, we got our second entry at $42K. This is what I call a pullback within an uptrend. Price hit a clear support level that served as the next stop level.
Finally, BTC made a breakout less than 2 weeks ago. This gave us our third entry at $62K.
Assuming the same dollar amount was used for each of the 3 trades, the average entry price on our BTC position becomes $43K. If this proves to be a failed breakout in BTC, we have plenty of profit cushion to exit our position.
Pros & Cons of each entry point:
The false breakdown is great in that it gives us a low entry price and the potential for a large and sudden move to the upside. However, price is still in a bigger downtrend (momentum is weak) and so the market is susceptible to rolling back down.
The breakout is great because we have momentum on our side. However, our entry price is higher.
The pullback within an uptrend is a mix of the above 2: We get decent (not amazing) price and momentum.
By buying a little at each, you diversify your entry and lower risk.
Trading off charts requires a ton of patience.
First, wait for strong support & resistance levels to be hit or breached.
Second, there’s a lot of day-day noise in the markets. What looked like an event on Monday, could no longer be valid by Friday. This is why I use weekly charts and I wait for the week to finish before placing a trade. This gives added confirmation that the move is real.
Important Disclaimer: This blog is for educational purposes only. I am not a financial advisor and nothing I post is investment advice. The securities I discuss are considered highly risky so do your own due diligence.