4 Steps for Confirming Breakouts

Forward testing: How to stress test your trading strategy in real-time

1. Plot the necessary trading tools and indicators on your chart.
2. Watch the live markets for your trading setups.
3. If there’s a setup, take it and record down the results.
4. Rinse repeat till you have 100 trades.

Trend Reversal Is When: A candle close below the last higher low on the daily timeframe means that the trend has reversed. A candle close beneath the 200 day moving average on the daily timeframe means that the trend has reversed.

1. Step 1: A candle closes beyond an established level.
2. Step 2: Price forms a top after the breakout.
3. Step 3: The price pulls back to the broken resistance.
4. Step 4: The top after the breakout is broken.

Indicators to Use for Successful Breakout Trading

• Moving Average Convergence/Divergence or MACD: The MACD indicator is a common indicator that forex traders use, and there’s a good reason why.
• Relative Strength Index or RSI: This is a highly useful indicator to confirm reversal breakouts.

A false breakout is when price temporarily moves above or below a key support or resistance level, but then later retreats back to the same side as it started. This is the worst case scenario for a breakout trader that enters in a trade as soon as price breaks.

Recap

1. Stop chasing parabolic moves. If you see strong bullish momentum and you see the candles are getting larger, don’t chase the parabolic move.
2. You want to trade and breakouts with a build-up.

Best trading indicators

• Stochastic oscillator.
• Moving average convergence divergence (MACD)
• Bollinger bands.
• Relative strength index (RSI)
• Fibonacci retracement.
• Ichimoku cloud.
• Standard deviation.
• Average directional index.

The logic is that the price may continue moving in that direction after the breakout occurs. Other traders watch for false breakouts, and then trade in the opposite direction of the breakout. This is because they believe that if the breakout failed, the price may continue moving back in the other direction.

One to two hours of the stock market being open is the best time frame for intraday trading. However, most stock market trading channels open from 9:15 am in India.

7 Technical Indicators to Build a Trading Toolkit

• On-Balance Volume.
• Accumulation/Distribution Line.
• Average Directional Index.
• Aroon Indicator.
• MACD.
• Relative Strength Index.
• Stochastic Oscillator.

What indicators do professional traders use? Most professional traders use Technical Analysis, and some examples are momentum indicators such as ALMA, MACD, MA indicators. They also use mean reversion indicators which include the RSI, Bollinger Bands and also MACD.

One limitation of OBV is that it is a leading indicator, meaning that it may produce predictions, but there is little it can say about what has actually happened in terms of the signals it produces. Because of this, it is prone to produce false signals. It can therefore be balanced by lagging indicators.

SMA calculates the average of price data, while EMA gives more weight to current data. More specifically, the exponential moving average gives a higher weighting to recent prices, while the simple moving average assigns equal weighting to all values.

Calculating the Average Directional Movement Index (ADX) +DM = current high – previous high. -DM = previous low – current low. Use +DM when current high – previous high > previous low – current low. Use -DM when previous low – current low > current high – previous high.

It is a lagging indicator, meaning that it confirms an uptrend or downtrend after the direction is already established. The ADX will not change until after the market or security has already reversed its trend. Adding other indicators will help confirm the ADX reading.