Finding entries using a breakout

This lesson will now show you a second way of trading with support and resistance levels using what is called 'breakouts' – when the price breaks through a support or a resistance level.

Trading when the price breaks through support or resistance

This method is different to entering when the price finds support or resistance. Instead, you wait for the price to break through a support or resistance level.

There are two methods to do this:

1. Trading as soon as the price breaks through a level
2. Waiting for when support becomes resistance or vice versa.

Method 1: Enter your trade as soon as the price breaks through

First you identify support and resistance levels on your chart, as shown on the following chart:

1. Resistance levels
2. Support levels

Wait until a candle either closes above resistance or below support. In the following chart, you can see that a candle has broken through, and closed above the resistance level:

1. Resistance level
2. Candle has broken through and closed above the resistance level.

You can now enter a long trade once the candle as closed. The stop loss goes below the support level:

1. Resistance level
2. Long entry
3. Stop loss.

In order to determine your profit target, you find the next support level above your entry as shown in the following chart:

1. Resistance level
2. Long entry
3. Stop loss
4. Profit target

Method two: Waiting for price to come back to support or resistance

Method two is very similar to method one, only instead of entering as soon as a candle closes above resistance or below support, you actually wait for the price to come back to the level it broke through.

Take a look at the following chart where you can see a candle breaking below a support level and closing on the other side:

1. Resistance levels
2. Support levels
3. Candle has broken below and closed below the support level

Instead of entering a short trade as soon as the candle as broken below, you wait for the price to go back to the previous support level and see if this level now becomes resistance. Take a look at the chart below:

1. Previous support level.
2. Green shaded area shows the previous support level now acting as resistance.

Once the price has found resistance at the previous support level, then you enter into a short trade. The stop loss goes above the now resistance level as shown in the following chart:

1. Support that is now resistance. 
2. Short entry after the price found resistance.
3. Stop loss on the other side of the resistance level.

To find your profit target, you then find the next support level down, as shown in the following chart:

1. Support that is now resistance. 
2. Short entry after the price found resistance.
3. Stop loss on the other side of the resistance level.
4. Profit target at the next support level down.