01 The cycle is more important than the price breakthrough
The breaking of the price level means that the market's stability is shattered, leaving the bounds of price swings and starting to exhibit directional movement.
We can easily understand the advantages of this strategy, as the formation of any trend begins with a breakout.
The development of a trend is formed by repeatedly breaking through resistance, eventually leading to the formation of mainstream expectations that continuously drive the trend to accelerate.
If the breakout and development of a trend are seen as expectations, then consolidation and boundary volatility are also forms of market expectations.
The former positively impacts participants, while the latter negatively influences traders.
When negative expectations arise, the current “range boundaries” become prominent in the minds of participants. What is the manifestation of this?
Disagreement between buyers and sellers, which shows intense competition because no one can identify high-value trend information from the current oscillations.
On one hand, the market shifts with dense trading during consolidation, while on the other, volatility gradually converges under negative expectations.
What concept can we derive from this?
When volatility converges to an extreme, it means participants have taken their maximum positions, and market sentiment is suppressed by negative expectations for a long time.
Bulls and bears are in a game, and at the moment of showdown, many trend-following "fence-sitters" are waiting to take sides. What do we trend traders do? We push down the losing side and favor the winning side.
What is the ideal breakout trading cycle?
Searching for so-called "breakouts during consolidations" in various cycles is a brainless strategy that can easily lead to frequent chases and stop-losses. Small-period oscillations are often due to light trading during certain times, such as late nights and early mornings.
Some immersed in hourly or minute-level breakout trades perform terribly for this reason.
The essence of a breakout is the change in the market state, transitioning from negative to positive expectations, which cannot be swiftly accomplished in short cycles. The primary focus should be on daily cycle convergent oscillations.
02
Wide-range to narrow-range, breaking out after convergent oscillations
The overall logic behind breakout trading guides and motivates us to trade, even though we cannot know in advance if the breakout will be valid.
But we know that wide-range oscillations signify divergence, with no essential difference in the power balance between bulls and bears.
If it then converts to narrow-range oscillations, it means volatility has converged to an extreme, making the effect of the breakout more significant.
Key: Contraction of volatility boundaries, overlap of wide and narrow range boundaries, daily cycle as the preferred trading period.
03 Breakout pattern signals solidify some entry strategies. Using high-probability pattern signals can better help us enter positions at key breakouts or after minor breakouts. The goal is to avoid potential “false breakouts” rather than seeking the perfect breakout.
(i) "Boundary" breakouts on daily charts and the startup patterns of minor breakouts
Consecutive ups and downs
One side gains the upper hand, gradually seizing control of the trend.
Direct transition of market volatility from convergence to expansion
If the breakout on a daily cycle is taken as the criterion, there will be significant point loss. Therefore, the cycle can be compressed, and faster judgment can be made at hourly levels.
Execute entry in small cycles like 1H/4H; for those pursuing precise points, it can be further compressed to shorter minute levels like M15/M30.
However, do not compress excessively, as it can result in over-sensitivity. For example, using a 5-minute chart to view breakouts might lead to rash entries if the price barely touches, usually leading to losses.
(ii) Signals of false breakout reversals
The primary thing to acknowledge
No one can predict the future nor determine whether a future breakout will be "real" or "fake." The crucial part is not the false breakout itself, but the reversal breakout that follows, which must be recognized.
04
Ultimately, the essence of breakout strategies is to pursue momentum release and the continuation of a trend. It is a probabilistic game based on converging market volatility, not merely drawing various trend lines on high and low points to identify "breakouts."
Trend lines cannot help you identify "breakouts" faster. Instead, they might constantly provide excuses for "breakout entry," but are they objective? That is unknown. However, remember that behind a perfect trend example, there are two failed breakouts.
If you enter trades just to capture a "breakout," it is difficult to effectively use this strategy. Such traders only see the breakout in partial trends and have no concept of the future price trend.
The core of breakout strategies is not the pursuit of a perfect "pattern" but the understanding of trend development and following the market state transition.
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