How to Enter a Market Before the Breakout

Businessman using crystal ball

Happy Friday!

This week’s question comes from Sherry, who asks:

How can I overcome the fear of missing out just before a market breaks out? I’ve gotten better at identifying patterns and momentum, but often miss moves because the market doesn’t retest the broken level.

Trading breakouts is one of the most enjoyable and profitable techniques I employ. There’s nothing like catching a 500 pip move that you saw coming from the start.

But what about when you miss that 500 pip move?

It’s gut wrenching, I know. You wait days or even weeks for the breakout, only to watch the market take off without you.

I’m a firm believer in the idea that the next quality setup is just around the corner. If you miss a big move, it’s better to stay focused on the road ahead than to beat yourself up over something you can’t change.

However, there’s no doubt that a 500 pip profit is a big miss when trying to build a trading account.

So in the spirit of doing all you can to catch favorable setups while protecting your capital, I wanted to share a method I’ve been using recently that helps me make more money while protecting what I have.

By the time you finish reading this post, you will know how to enter a market before it breaks out. In doing so, you will simultaneously remove the fear of missing out (FOMO) from your trading and also increase your risk-to-reward ratio.

Read on to learn how I caught the recent GBPJPY sell-off before the market even broke down.

Also be sure to check the comments section below for a little extra food for thought on today’s topic.

Step 1: Identify the Pattern

The very first thing you need before you can even consider trading a breakout early is a technical pattern.

Of course, it could also be something as simple as a horizontal level. However, I’ve found that this technique tends to work incredibly well with channels.

Let’s use the GBPJPY ascending channel below as an example.

GBPJPY ascending channel

There’s no denying the pattern above. Both support and resistance are well defined. The market is also respecting the levels on the daily time frame, which is what we want to see.

Another factor here is the time it’s taken the market to carve this ascending channel. Over the years I’ve discovered that the longer a pattern takes to form, the more reliable and profitable the resulting breakout is likely to be.

This channel on the GBPJPY certainly hasn’t disappointed.

Step 2: Evaluate the Context

As I mentioned a couple weeks ago, context is key. Whenever you get confused about whether a particular pattern is bullish or bearish, sometimes all you need to do is click the “zoom out” button.

Seeing the multi-year trend and structure can bring clarity to any technical pattern.

You’ll recall how the GBPJPY twelve-month ascending channel took on a more bearish tone once we zoomed out to view the last five years of price action.

Here’s the weekly time frame:

GBPJPY weekly time frame

We can now see that this was nothing more than a short-term uptrend amid a long-term downtrend.

When I see something like this, I immediately switch to watching for selling opportunities, but not until I have reason to believe a breakdown is imminent.

That brings us to step three.

Step 3: Watch for Signs

In the last Q&A post, a few readers asked how I would have entered short, considering the pair hasn’t retested the broken level.

Update: The GBPJPY did, in fact, test former channel support as new resistance late last week.

You may want to visit that post (link above) before proceeding. But in case you don’t get a chance to review it, here’s the ascending channel I was watching:

GBPJPY ascending channel

The truth is, I actually shorted the GBPJPY before it broke down from the channel above.

Here’s what I posted in the member’s area at that time:

GBPJPY 1-hour level

That post was made on May 21, just two days before the GBPJPY broke from the twelve-month channel.

And as you may have guessed, a break of the intraday level shown above is where I began watching for a short entry.

Here’s what happened next on the 4-hour time frame:

GBPJPY breakdown on 4-hour time frame

If I hadn’t sold following the break of the smaller trend line, I probably would have missed this 500 pip move. Note how the market never actually retested the twelve month level as new resistance, at least not right away.

This technique of entering early also works incredibly well when pyramiding. If you’re able to catch a breakout before it begins, you can add to the position once the break is confirmed.

Now, to be clear, I don’t usually trade anything below the daily time frame. However, in this case I was already convinced that a breakdown was coming and I wanted to be on board for the move.

I also knew that the market may not retest channel support following the break. The yen pairs can move quickly under the right conditions, especially if fear begins to crop up across the market as a whole.

By the time the pair began to break the intraday level above, it had already carved a lower high in April. Remember that from the last Q&A post?

The GBPJPY was also rebounding from channel support for the second time in two months. That may sound bullish—until you realize that it was the first time the pair tested this support level without first retesting channel resistance.

What’s the significance of that?

You may recall that I’ve written about this type of “heavy” price action before. Whenever you begin to see a market lean on a level like the GBPJPY did, it’s a sign that a breakout is imminent.

No Retest, No Problem

One of the toughest challenges for any trader is determining whether or not to wait for the all-important retest following a breakout.

For those who aren’t familiar with this, let me give you a quick example.

Let’s assume for a moment that the EURUSD has just broken ascending channel support amid a downtrend. Let’s also assume that the support level is 1.70.

So the pair has closed the day below 1.70 (remember, I use New York close charts which means a 5 pm EST close).

Once that happens, the ideal scenario would be a retest of the 1.70 level as the new resistance level. That retest is where you would watch for a sell signal such as a pin bar.

However, the market doesn’t always play by the rules. There will be times when the market breaks out and then takes off without a retest. This is especially common in strong trends.

So what’s the solution?

One solution is to enter before the breakout occurs. Using the steps above, you can do this with relatively low risk and if you do it right, you can actually increase the potential reward.

That said, there is no technique that will allow you to catch every breakout. No matter how long you trade and how good you get, there will always be markets that get away from you. That’s just part of the job.

But as I often say, you only need one favorable trade each month to grow an account. So with that in mind, be sure to use the technique discussed above sparingly.

Final Words

I don’t usually enter a market before it has broken free from a technical pattern of some sort. However, it is something I’ve started experimenting with more over the years, and the results are promising.

Not only does it offer a more favorable risk-to-reward ratio, but it also eliminates the fear of missing out after the break. Since you’re already in the trade, there’s no need to stress about whether or not the market will retest the broken level.

However, it’s essential that you evaluate the context of the technical pattern before attempting to enter early. You need to have a firm understanding of what the market is telling you. Otherwise, you will get caught on the wrong side of the market.

It’s also important to watch for signs of strength or weakness. This is what will give you the early signal to go long or short before the breakout. These include things such as channels, trend lines and even swing highs and lows.

Last but not least, take care with this technique of entering early. While it can produce more than favorable risk to reward ratios, it can also backfire if you aren’t careful. As always, it’s best to experiment in a demo account or with relatively small position sizes in your live account.

Your Turn: Ask Justin Anything

I’d love for this new weekly Q&A to be successful and provide an invaluable repository of answers to common Forex questions.

To do that, I need your help.

Here’s what you can do to get involved and have your question answered in next week’s post:

  1. Ask questions. Post them in the comments below or Tweet them to me @JustinBennettFX
  2. Help me answer questions. If I missed something or if you have something to add, don’t hesitate to leave a comment below.

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