Breakout Trading with Bollinger Bands

Spot & trade breakouts with this strategy (example included) →

Hey there 👋🏼

Breakout trading is one of the most popular trading techniques. It involves taking a position in a stock during the early stages of its trend. If managed well, a breakout strategy can be very lucrative while offering limited downside risk.

In today’s edition, we will learn how to spot and trade breakouts by combining 2 simple indicators.

Understanding Breakouts

A breakout occurs when a stock’s price breaks and goes beyond a defined upward, downward, or sideways range, mostly supported by above-average volumes.

Breakouts act as excellent starting points for large price swings and major trend reversals, making them perfect for trading.

A Breakout Trading Strategy (with example)

We will be using Bollinger Bands and RSI to identify & trade breakouts in the weekly timeframe.

Entry

1) Spot an area in the chart where the Bollinger Band width is narrow or ‘squeezed’.

2) Wait for the RSI to break out above 60.

3) Move to the daily timeframe. Once a bullish candle is formed with above-average volumes, an entry can be taken.

> It is preferable if candles are forming between the moving average and upper Bollinger Band at this time.

Exit

1) Spot an area in the chart where the Bollinger Band width is narrow or ‘squeezed’.

2) Wait for the RSI to break down below 50.

3) Move to the daily timeframe. Once a bearish candle is formed with above-average volumes, an exit can be made.

> It is preferable if candles are forming between the moving average and lower Bollinger Band at this time.

A bullish or bearish candlestick/chart pattern formed in the daily timeframe after the stock meets the first 2 conditions is a good confirmation for entering or exiting trades.

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Example: Long Trade in FACT

A Bollinger Band Squeeze was spotted in the weekly timeframe after a period of consolidation (highlighted in orange). Since then, the RSI also broke out above 60 (highlighted in red) ⬇️

Entering this trade in the daily timeframe when a bullish candle is formed with above-average volumes (marked by a black arrow) and exiting it when a red candle with high volumes is formed, gave ~30% return in 12 trading days.

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