"Playing Catch Up" - A clear, easy to follow 5 Step Trading Plan Template for Breakout Trading.
Step 1. Recognize the change in trend. Whether you use ranges, patterns, or stage analysis, all essentially help to confirm that the trend has changed from down or sideways to up (or vice versa, but just make sure its in the same direction you plan on trading!). In this case, we have a "U" shaped recovery which is comprised of an island-type reversal with a very clear sell off which was sharply supported on a high interest price level ($20,000) while then breaking out of the larger U reversal neckline at $25,000. Trend has changed from down/sideways to up (or Weinstein's Stage 2).
Step 2. Identify the breakout. This trendline confirmed itself twice as support in 2021 and was broken in 2022. It then acted as resistance twice in 2023 before breaking last week.*
Step 3. Establish a price target. Here we have targeted the previous local high before the breakdown of the trendline. Price was unable to advance past this level last time, so its likely become a resistance level and an area of supply in the market.
Step 4. Ask yourself: what if I'm wrong? It's the question to always be asking yourself, but not too often where it keeps you from taking appropriate amounts of risk. It's important to be prepared for all scenarios, even the ones you believe to be least likely. We place the stop just below the trendline breakout in case price breaks down. Even if its just chop, we can reestablish a new position under new circumstances. We will not be left holding in case price goes to 0.
Step 5. Confirm risk management. In this case, this trade happens to coincide with a 4:1 reward to risk ratio, which means if I am trading with the same amount of capital for every trade, I can lose 4 times and win 1 time to breakeven, or as I have written on the chart, I can lose 3 times and win 1 time to be profitable. As a trader I recognize I will not win every single trade, so to remain solvent I must account for this. You need to know your win/loss rate in order to have a clear idea of what R/R ratio is appropriate for you!
*Note: Assuming we hadn't gotten long earlier, the breakout at Step 2 is the ideal price to go long. This can be difficult if you aren't on your computer/phone all day. This tutorial is how to play catch up with a simple risk management plan. There are also ways to decrease risk even more, by layering buys from this entry down to the trendline breakout, increasing the size of purchases as price gets closer to the breakout price (this is still done in conjunction with our risk size of "1"). This lowers our average purchase price, and with it our risk, because our stop-loss price does not change.
I hope this helps, let me know in the comments section what you think.
Thanks for reading.
-harambepay
Step 1. Recognize the change in trend. Whether you use ranges, patterns, or stage analysis, all essentially help to confirm that the trend has changed from down or sideways to up (or vice versa, but just make sure its in the same direction you plan on trading!). In this case, we have a "U" shaped recovery which is comprised of an island-type reversal with a very clear sell off which was sharply supported on a high interest price level ($20,000) while then breaking out of the larger U reversal neckline at $25,000. Trend has changed from down/sideways to up (or Weinstein's Stage 2).
Step 2. Identify the breakout. This trendline confirmed itself twice as support in 2021 and was broken in 2022. It then acted as resistance twice in 2023 before breaking last week.*
Step 3. Establish a price target. Here we have targeted the previous local high before the breakdown of the trendline. Price was unable to advance past this level last time, so its likely become a resistance level and an area of supply in the market.
Step 4. Ask yourself: what if I'm wrong? It's the question to always be asking yourself, but not too often where it keeps you from taking appropriate amounts of risk. It's important to be prepared for all scenarios, even the ones you believe to be least likely. We place the stop just below the trendline breakout in case price breaks down. Even if its just chop, we can reestablish a new position under new circumstances. We will not be left holding in case price goes to 0.
Step 5. Confirm risk management. In this case, this trade happens to coincide with a 4:1 reward to risk ratio, which means if I am trading with the same amount of capital for every trade, I can lose 4 times and win 1 time to breakeven, or as I have written on the chart, I can lose 3 times and win 1 time to be profitable. As a trader I recognize I will not win every single trade, so to remain solvent I must account for this. You need to know your win/loss rate in order to have a clear idea of what R/R ratio is appropriate for you!
*Note: Assuming we hadn't gotten long earlier, the breakout at Step 2 is the ideal price to go long. This can be difficult if you aren't on your computer/phone all day. This tutorial is how to play catch up with a simple risk management plan. There are also ways to decrease risk even more, by layering buys from this entry down to the trendline breakout, increasing the size of purchases as price gets closer to the breakout price (this is still done in conjunction with our risk size of "1"). This lowers our average purchase price, and with it our risk, because our stop-loss price does not change.
I hope this helps, let me know in the comments section what you think.
Thanks for reading.
-harambepay