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Managing Trades After Breakouts
"Managing trades after breakouts: discover how to lock in profits, minimize risks, and use trailing stops and position sizing for long-term trading success."
Wikilix Team
Educational Content Team
Experiencing a genuine breakout is hard to beat once you've gotten to its conclusion. The exhilaration of observing a price break out from a level you have been paying attention to, resulting in momentum kicking in, and the trade then goes your way, is difficult to replicate. The hardest part is actually using your entry!
Many traders can recognize a breakout, but very few know how to manage it once they are in the trade. Do anything poorly, and you could well take a winning setup and turn it into a losing trade. In this article, I will discuss beneficial management options for the life of a breakout trade, including risk modification, profit-taking, and building confidence in letting winners run.
Once You Know It Is a Breakout.
Breakouts happen in a flash, or sometimes with a fair amount of volatility. Without any systematic management options, fear or greed can take over. Proper trade management can assist traders with issues experienced during the difficult psychological stages of breakout trades, for example:
• Protect your profits on pullback
• Reduce risk in trade while moving your stop
• Maximize positive gain while letting the trade run with momentum
• Stay disciplined when your instincts may make you trade emotionally
Good trade management can mean the difference between making good, safe money and being frustrated by less-than-expected gain.
The first aspect of managing a breakout trade is determining, based on factual and historical evidence, where you see the move going.
• Range measure: When you're trading, a range breakout, measure from the top of the range, project that range from the breakout point.
• Chart patterns: If the breakout occurs based on a pattern, like a head-and-shoulders or triangle, then you have logical measure targets.
• Nearby supportive resistance by which you can make a profit from your move.
It is always best to have these predetermined, do not rely on guesswork when you are to take profit. That way, you will have an even more comprehensive exit plan.
A stop loss, or a stop-loss order, is designed to protect you from any swings, in the unlikely event that you experience some volatile whipsaw action in the opposite direction of the trade. Consider adjusting your stop-loss orders after a breakout to decrease risk:
• Move to breakeven, once the price has moved significantly in your favor.
• Swing lows or swing highs will typically present the most logical stop areas.
• ATR (Average True Range) based stops: For volatility protection, put your stop at one to two ATR values beyond your entry point.
You aim to create a balance between safety and allowing your trade to breathe.
A trailing stop is a movable stop that moves with the price. Trailing stops allow the trader to ride a trend and protect against giving all profits back.
• Percentage-based trailing stops: Move the stop as the price moves by a predetermined percentage.
• Indicator-based trailing stops: Trailing stops can be based upon different indicators, too. A trader may use a moving average, ATR values, or other indicators to trail stops.
• Manual trailing: Follow prices and manually adjust your stops often right under a new swing low (for long trades) or over a new swing high (for short trades).
Trailing stops can help maximize profits when breakouts stick to their upward bias, and lock profits in when momentum fades for any number of reasons.
Instead of closing the trade entirely, consider taking partial profits or scaling out of the position.
• You may take profits at the first target and leave the rest of the position to run with the trend.
Scaling out can relieve some of the pressure of holding a full position, and also locks in gains from the original position, all while still giving you the potential for another continued move higher.
Breakouts: Market conditions can change quickly, and it is essential to be mindful of the following:
• Volume: Strong breakouts are characterized by volume support. When volume begins to taper off, momentum and price often follow suit.
• Volatility: When there are large swings, profits can disappear quickly if stops aren't handled properly.
• News and Events: Economic releases can extend breakouts or be a complete reversal event.
Be flexible to adapt to changing conditions, as it will help with trade management.
• Moving Averages: This can be useful as dynamic support/resistance during trend periods.
• Bollinger bands: If a breakout is hugging the upper/lower bands, there is likely momentum.
• RSI and MACD: To further confirm if momentum is strengthening or weakening.
• ATR: To help set stops and measure volatility.
The above tools can assist with confirming trades and your management decisions, but ultimately, you will be the one to decide to exit or stay.
Let's say we have EUR/USD relaxed in a range of 100 pips between 1.0800 and 1.0900, when all of a sudden we have a breakout above 1.0900 on good volume:
• Entry: Buy at 1.0910 on the breakout with confirmation.
• Stop at: 1.0870 (below support).
• Target 1: 1.1000 (projected distance from measured range size = 100 pips).
• Trade management:
o Raise stop to breakeven once price approaches 1.0950
o Once the price reaches 1.1000, take half to the bank as a profit.
o Move stop up under swing lows on any additional rally after taking profits.
This trade management approach will allow you to exit the trade with a profit, with lower risk at every stage.
• Stops at entry: No changes to the stop point even after a big move.
• Taking profits early: Deciding when to bank profit prematurely.
• Overtrading: Taking every breakout instead of confirming it.
• No context: not aware of outside context (market trend, and news).
• Keep a journal on every breakout trade to learn what you did well or poorly.
• Use your plan or guidelines instead of your emotions or feelings.
• Use alerts to manage your trades, so you don't have to sit there and stare at the chart all day.
• Quality setups rather than chasing every time prices move.
As traders it is always about catching breakouts and it's all very exciting but in reality what is going to make you successful is how you manage your trades after you entered it, how far you ultimately take it; being realistic with your target, should you adjust your stop loss, a trailer or break out of the trade are all part of the trade management process.
By creating a plan using some or all of the technical tools, follow-on discipline, and patience, you will be able to lock in profits and keep your risk at a manageable level while still being open to more opportunities.
In the end, the success of trading is not really about getting into a trade only, but staying in that action and managing the trade, the 'art' of trade management. If you can find, develop, and hone in on that single skill aspect, breakout trades can become one of the most helpful collections of tools in your trader's toolbox and strategy.
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15 min
Reading time
Intermediate
Difficulty