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Breakout trading strategy with OrderFLow

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By Yuriy Bishko Updated February 29, 2024
BikoTrading Academy

 

As a crypto trader, you need to navigate through a lot of information and misinformation. In this article, we'll cover a particular aspect of crypto trading – breakout trading – and discuss why many traders use the breakout strategy as their best strategy for day trading. We will explore three types of breakouts: after a trap, after liquidations, and after absorption.

What is a breakout and how does it work?

A breakout occurs when the price consolidates within a specific range and then suddenly moves in a specific direction, breaking free from the previous range-bound trading. This movement often leads to substantial price increases or decreases. When you decide to trade breakouts, understanding where and when prices will move is of huge importance. This requires solid confirmations based on indicators. 

Order flow analysis can confirm the strength of a breakout. It  refers to the real-time data that reveals the buying and selling activities in the market, including the volume and price at which trades occur. When a breakout occurs, significant order flow in the direction of the breakout indicates a higher likelihood of the trend continuing. For example, if there is a substantial increase in buy orders (demand) during a bullish breakout, it signifies a strong upward momentum.

orderflow trading breakout strategy

Trading after a trap

A "trap" is a common occurrence in the crypto market. It happens when the price consolidates within a range, and then suddenly moves in the opposite direction, often trapping retail traders who buy after a significant price rise. Institutional traders absorb these retail buys, creating the trap, and may open short positions to profit from the impending price drop. Successfully trading this type of breakout requires various indicators for confirmation, such as open interest, delta, and volume profiles. 

  • Open interest represents the number of open trades on an exchange. A significant increase in open interest can signal a potential trap.
  • Delta measures the difference between the volume bought and sold. A notable change in delta can be a confirmation of a trap. 

If you are looking for more strategies for trading futures with the help of Open Interest and Delta, check this article

To calculate your position size, you can use platforms like TradingView, considering your risk per position and your account size. It's vital to set stop losses above significant orders that protect the price from rising and take profits before reaching significant levels to secure your profits.

orderflow trading breakout strategy

Trading after liquidations

Liquidations occur when traders who employ leverage are automatically liquidated when their positions are in danger. This often leads to a significant sell-off, and sometimes institutions absorb these liquidations. To trade this type of breakout, wait for price retests of significant volumes and set stop losses just below the retest area. 

Liquidations often result in a cascade of market orders, leading to significant order flow in the direction of the liquidation. Traders can identify these situations and strategically place orders after the retest of significant levels.

orderflow trading breakout strategy

Trading after absorption

Absorption is a phenomenon where the market accumulates a substantial number of coins at a specific price level. This accumulation typically precedes a breakout. You can trade this type of breakout by looking for significant volumes being absorbed and waiting for price retests. Similar to the other breakout types, you can set your stop loss just below the significant absorption area.

orderflow trading breakout strategy

Learn more about these breakout strategies in our video

What factors to consider when trading a breakout?

It's crucial to pay attention to various indicators such as the VWAP, volume profile, and cumulative delta. These indicators help you identify the best entry points and gain more confidence in your trades. For example, data from the Order Flow trading strategy guides traders in choosing optimal entry and exit points. A sudden surge in buying or selling activity can signal entry points for traders seeking to join an ongoing breakout. By the way, we regularly share a lot of signals in our private community of traders. Join the club and enjoy support from professional traders every time you need it. 

Properly calculating your position size is essential to manage your risk effectively. Platforms like TradingView can help you determine the quantity to trade based on your risk per position and account size. Remember that breakout trading is not without risks, and you must implement risk management strategies such as setting stop losses and taking profits. 

If you want to be among successful traders, strategies based on the breakout will require more analysis from your side, but at the same time, they will bring more profits. In some cases, you may need to wait for additional confirmations before entering a trade. This might involve waiting for a price retest of significant volume levels, a break above a daily VWAP, or other technical analysis patterns that align with your breakout strategy. 

Conclusion

Breakout trading can be a powerful strategy for capturing significant price movements in the market. By identifying traps, liquidations, and absorption patterns and using various indicators and confirmations, you can improve your trading accuracy and increase your potential for profits. Always set stop losses, take profits, and carefully calculate your position size. If you're looking to further refine your skills in breakout trading and learn new crypto trading strategies, join our educational course on Order Flow trading. We provide all the necessary information, programs, and resources for our crypto trading community to improve their trading results and profits.


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