Bitcoin Trading For Beginners – Breakout Strategy Example
Before you enter a trade, you have to have a plan – a strategy!
In this post we’ll show you a high probability crypto trading strategy which you can use to reach high profits, step by step – even as a beginner.
The Breakout Strategy
Setup For Our Breakout Strategy Example:
- We define what we are looking for: A breakout of an altcoin with a larger upcoming move of at least 50% (which we assume to come in the near future). We want to buy low and sell higher. (e.g. 1 BTC → 1.5 BTC or more)
- Time frame for the trade duration should be several days (maybe even few weeks) – Such bigger moves can also occur within a single day, but more often it takes a little longer.
- We use charts in BTC
- We use at least 2 charts: The weekly and/or daily, and the 4 hour chart. The weekly or daily chart is to see the entire chart from the start of the altcoin, so you see how low price actually is in the bigger picture and some other details. The 4 hour chart is the time frame we want to trade in, as this fits to a trade which is supposed to run for at least a couple of days, maybe even a few weeks.
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Planning The Details:
The first step of our plan is to look for a precise entry.
At the moment you can use the classic buy breakout strategy relatively easy. We find extreme low areas in the bigger picture of many altcoin charts. Most of the alts have been bleeding out in the last couple of months. Like those:
The breakout strategy in general is about identifying resistance or support areas from where price is about to breakout in a new direction. Either it breaks out upwards from a recent low price area (support area), or it breaks down from a recent high price area (resistance zone).
Now, the sticking point is to look for clear breakouts of the low price zone. Otherwise you might have to wait for weeks or months till price coincidentally finally starts into a bull market again, in case it does.
So we look for the combination of 2 factors:
Look for low price altcoins + signals of confirmed breakout
That way you don‘t get the very lowest entry price, but the chart is more likely to go up soon. And that‘s the point – profit from an uptrend soon and not somewhere in the future.
Here is a chart example of what we are searching: A chart which looks like it might have past it‘s bottom and could be about to start an uptrend in the near future.
So far it sounds easy, right? But the devil is in the detail:
The strategy is to buy at a point where the new uptrend seems confirmed. So it‘s more likely not just a fakeout which falls back to the bottom but really the beginning of an uptrend.
When you find a breakout like in the example below, wait for confirmation of the breakout. What we want to see is a higher low which stays above the last resistance zone (illustrated by our black line).
The breakout seems confirmed when price stays above the recent resistance, which should turn into support. The confirmation is even stronger when we get a second higher low.
The recent chart of EOS delivers an example for that scenario:
2. Stop Loss
The next image below shows our example with the entry price and where we set the stop loss.
After your entry it‘s crucial to set a stop loss order as there is of course never a guarantee for anything.
Price could dump over night because of sudden negative fundamental news and stay under your entry. That‘s what you want to avoid.
Stop Loss Area:
A stop loss makes sense at an area where the trend definitely seems to be broken (at least for the moment) – that‘s where pro traders get out of it quickly before bigger damage can happen.
Just as a reminder what happened to thousands of traders in summer 2017, when they didn‘t expect their coins to go down that much.
Important: Don‘t Be Afraid Of Getting Stopped Out
Not having an emotional problem with beeing stopped out separates the winners from the losers.
The winners can take it rationally: One big gain will compensate a couple of small losses by far. Especially in crypto. So not getting emotionally caught by one single trade is very important.
Example of getting stopped out:
Buy zone would have been in the area of the second higher low range of the breakout.. But price crashed and the stop was under the boken support line. Look how good it would have been to get out there..
One big gain will compensate a couple of small losses by far.
Why Many Traders Don’t Use Stop Losses
Amateurs mostly get emotionally attached to their running trades. They kind of fall in love with the coin, all their hope and greed gets subconciously projected into the altcoin they just bought and they cannot stay objective anymore.
So when price turns against them, they don‘t want to believe it. „It can‘t be, it will come back, come on baby, get back up… „ They get lost in irrationality and their emotional attachment instead of just quitting the trade with a marginal loss and get to the next one. Don‘t think „but this is NEO, this coin rocks, it has to go up because it‘s so cool..“ – don‘t be fooled by emotions like that. Stay rational. Have the discipline to get out.
Let‘s have a look at our profit target:
3. Take Profit Target
We estimate where price might go from the breakout zone within a time frame from several days. That way we get our risk to reward ratio – which may just be a theoretical ratio based on your estimations, but still it‘s important to estimate it as it tells you why you make the trade and if it‘s worth the try. Rather than having now clue, with no analysis in advance and randomly buy and wait like a gambler.
How to Estimate Profit Targets:
So why do we think that price could rise at least about 50% in this case?
In this example we use former resistance and support areas for our estimation. When price starts to climb up again, it often targets former key price levels. For instance a level from where it had broken down:
In the bigger picture of EOS (daily chart) there is this obvious former support level which had got broken after some days in August with this long red candlestick. Such an area is generally a high probability target. You see that at the time of taking the screenshot price has even passed this minimum target estimation.
Here you see the target in the 4 hour detail near our entry:
At this point we wouldn‘t have known how high price might climb further. A hedging strategy therefore would be to take partial profit, to be in profit for sure.
Let‘s say you take half:
Entry was 0.00017776
Exit is 0.00026295
Gain for half of your position: 0.00008519 (close to 50% of price)
You can let the other half ride and see how high it goes. Here comes our stop loss again – as risk management. We move it up above our entry, to a level where price is not allowed to fall back in order to hold the trend.
Now you‘re safe and even in profit in any case.
Let the winner ride and move up stop loss again:
The Stop Loss Movement Has An Upside And A Downside:
The upside is that you don‘t have to worry about the top, as the stop loss position will decide when you‘re out of the game.
The downside is that you will never get the top as the stop will always be below. So it depends on your personal style if you want to manually take profit on a level which is calculation-wise definitely a great gain and it‘s what you expected from the trade.
Depending on your personal style you can take profit with the rest of your position in top areas of the wave movements of price – incase price would crash afterwards – you‘d have got more out of it than with letting the stop loss decide.
If you‘d have taken profit between 0.00030000 and 0.00035000
that would be about 100% gain since your entry at 0.00017776 !
General Underlying Profit Mindset of Professionals:
Pro traders appreciate such an outcome and are happy to leave the trade behind them.
Amateurs get lost in greed and tend to ignore where price already is, dreaming of other extreme highs, and are prone not to take profit when it’s there. In that case they should at least secure the way buy moving the stop loss upwards.
Not Taking Profit – The „Too High Expectations Trap”
A huge beginners mistake is not to lock in profit when it‘s there because of greed: They have certain expectations how high price should go because they compare the chart with others where price had pumped in certain extreme highs.
Trading with such a strong bias is dangerous: Newbies tend to wait way too long to take profit, often till the top is past long ago and price is descending back.
Many even watch price go all the way back to their entry till they get our with nothing. Or even worse – they lose money in a trade where they could have had a great gain! But maybe „only“ 80% instead of the 200% they had been dreaming of..
Profit is always better than no profit, right?
Here’s The Breakout Strategy Again At A Glance:
- Look for Altcoins which are overall on a low level in the bigger chart picture (Daily)
- Look if there is a first sign of a breakout
- Look if breakout gets confirmed by resistance turning into support and higher lows
- Estimate target zone based on former price levels such as a bigger support area which was broken
- Define your entry price
- Define your stop loss under the support line which mustn’t get broken
- Manage the trade and hedge risk. Take partial profit, move up stop loss for the rest. Take profit higher or keep moving the stop loss.
This strategy gives just an example what you can do with few selected tools, to keep it simple.
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