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Breakout trading is used by traders to take a position within a trend market's early stages. 

1. What is a breakout?

A breakout refers to when the price moves above a resistance area, or moves below a support area. The breakout can occur at a horizontal level or a diagonal level, depending on the price action pattern.

Breakouts indicate the potential for the price to start trending in the breakout direction. For example, a breakout to the resistance level could indicate the price will start trending higher. 

When trading breakouts, it is important to realize that there are two main types.

●Continuation breakouts

Sometimes when there is an extensive move in one direction the market will often take a breather. This occurs when buyers and sellers pause to see what they should do next.

As a result, you will see a period of range-bound movement called consolidation.

If traders decide that the initial trend was the right decision, and continue to push the price in the same direction, the result is a continuation breakout. Just think of it as a “continuation” of the initial trend.

●Reversal breakouts

Reversal breakouts start off the same way as continuation breakouts. The only difference is that after this consolidation, traders decide that the trend is exhausted and push the price in the opposite or “reverse” direction.

2. How to trade breakouts?

In a breakout strategy, traders initiate long positions or exit short positions if the price breaks above resistance, or they may initiate short positions or exit long position if the price breaks below support.

Generally, here are the steps to follow when trading breakouts:

●Identify the candidate

 Find strong support or resistance levels and watch them. Remember, the stronger the support or resistance, the better the outcome.

●Wait for the breakout

Finding a good candidate does not mean a trade should be taken prematurely. Wait patiently for the price to make its move and make sure the breakout will hold.

●Set a reasonable objective

Set an expectation of where it is going in order to know where to exit the trade. This can be done by calculating an average move the price makes or measuring the distance between support and resistance.

●Allow the price to retest

This is the most critical step. When price breaks a resistance level, old resistance becomes new support or vice versa. In the majority of your trades, the price will test the level it has broken. Prepare for it.

●Know when your trade has failed

When the price attempts to retest a prior support or resistance level and it breaks back through it, this is where a pattern or breakout has failed. It is imperative you take the loss at this point.

3. Avoid false breakouts

When false breakouts occur, the price often moves just beyond resistance or support, luring in breakout traders, then reverses and doesn't continue moving in the breakout direction. This can happen multiple times before a real breakout occurs.

To avoid false breakouts, you need to utilize stop loss orders in case the breakout fails. In the case of going long on an upside breakout, a stop loss is typically placed just below the resistance level. In the case of going short on a downside breakout, a stop loss is typically placed just above the support level that has been breached.