Do the breakout strategies work?
Many traders often use breakout strategies to forecast price movement. Our team uses them as well. Today we’ll find out if they are effective and if we should pursue them.
There are many types of breakout strategies. The thing they have in common is that they based on price consolidation in the zone of any of price levels which can tell us about major players.
Such strategies are popular because they are simple: you don’t need to have deep knowledge of trading to use them.
In this experiment, we consider some of such strategies and analyze how accurate are forecasts that they help to make.
Breaking of support line and resistance line
Classic strategy under which you sell currency as soon as price breaks resistance line and buy if support line is broken. We’ll give you 15 cases when we could use this strategy and consider how effective it could be in these cases.
Although in all situations we considered price increasing after support or resistance level were broken, that doesn’t always mean the formation of a new trend. In 73,3% of cases, the price began long downward or upward movement after the breakout. In other cases, these tries were restrained.
However, we still think that this strategy is effective in combination with other tools of technical analysis, which will help to define the potential for price increase/collapse.
Breakout of MA
A similar strategy that can help to predict the direction of price movement. Here we also have 15 situations and we’ll test the effectiveness of such an approach.
In this case, the accuracy is lower than in the previous one. We receive significant price increase only in 60% of cases, let alone formation of a new trend. To make strategy more effective, we need to use additional instruments of technical analysis. Also, accuracy is higher at longer time frames.
Breakout of the price channel
This strategy can be based on Donchian lines or Bollinger bands that calculated by average price values. We considered average line crossing as a signal to enter. The order can be closed if one of the external lines is crossed. Similarly to other strategies considered in this experiment, we give you 15 market situation that can be used for such an approach.
Using breakout of price line strategy, we get higher accuracy which is 80%. And the necessity of using additional methods of technical analysis minimizes.
As a result of this experiment, we can make next conclusions:
Conclusion 1. Despite the fact that breakout strategies are based on similar algorithms, we found out that their effectiveness can be different.
Conclusion 2. A strategy that is based on support and resistance levels is a good instrument. But it is more effective in combination with other tools of technical analysis.
Conclusion 3. Breakout of MA has shown low accuracy in comparison with other popular breakout strategies because it gives many wrong signals.
Conclusion 4. Breakout of price channel gave us the highest accuracy of forecasts. Moreover, it doesn’t need to use other tools to define exit point, for example. Even if you are a newbie in the trading field, you can use this method and receive a high profit.
As you can see, breakout strategies can be called quite simple. However, they have their own nuances. Don’t worry! You don’t have to know all of them since our bots know! 🤖
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