Trade the Charts: The Breakout

Posted by Josh Blatchford | Education

The Two Schools

There’s two schools of thought when it comes to trading: Fundamentals and Technicals.

Fundamental analysis deals with the underlying asset. For instance in stocks that would mean net income or cash flow or sales growth. In Bitcoin that means issues like the scaling debate, forking and related news on Bitcoin’s use like when Japan investigates digital currencies generally and enables hundreds of thousands of retailers to accept it as payment for goods and services.

Most of our blog articles deal with fundamentals like these.

Technical analysis is based on the idea that all relevant news about the asset is reflected in the price. For Bitcoin, this means that its daily price action is all that a technical trader has to watch. There are many repeated price patterns over time since the bulls and bears fighting over price often has some psychology behind it. Psychology matters in trading.

Our Trade the Charts series is going to focus exclusively on Technical Analysis for Bitcoin.

Pattern #1: The Breakout

Our current pricing (Summer 2017) for BTC is unusual in that we are in a period of rising prices almost daily. Most assets whether stocks, bonds or Bitcoin spend most of their time not trending in one direction or another.

 

Non-trending asset prices are the seeds of a breakout trade. Check out this chart on the Euro/USD currency trade.

Support and Resistance

Look at the chart above. It looks like the bulls and the bears are fighting each other between Nov 2008 and Feb 2009 for control of this trade between 1.44 and 1.50. The bottom channel of this chart at 1.44 is known as support. For many months when the price has gotten down to or approached 1.44 support holds and the price bounces higher.

Like support on the top end of the channel is Resistance. The resistance here is at 1.50 where the price has not exceeded 1.50 for many, many months.

A breakout is when the support or resistance lines are broken.

Breakouts over the resistance or below the support are not always reliable to trade from but it is reliable enough that it is one of the standard technical analysis trading patterns.

Here is a Bitcoin 2 week Bitstamp chart with a more likely type of support/resistance pattern.

In our current environment, you are more likely to see higher highs and higher lows instead of the relatively flat pattern on the first chart. This support line drawn in blue is not on a set price but still looks to be a solid support line when drawn.

The resistance line isn’t quite as steep and it looks like the price is starting to rise above the resistance. Will that hold and see BTC move higher? Only time will tell.

 

Time Matters

Once you get a little practice looking at this pattern and drawing the support and resistance lines you will be able to find this pattern relatively easily. An important note on breakouts is that the longer the non-trending price ‘congestion’ takes place, the more likely a breakout will hold true when it happens. A 2 month support line will likely remain broken on a price drop than a 2 week line will.

 

Practice with Risk Control

If every pattern held true 100% of the time then we’d be retired from our trading efforts. Clearly that doesn’t happen so practice recognizing the patterns first and then trade it with amounts you can afford to lose. While trading take notes of the length of the pattern (by time and by difference in support and resistance prices) and track your results. Do longer periods of congestion mean more profits for you? Do smaller or larger ranges between support and resistance affect your profits?

Many traders use the breakout pattern as one of numerous patterns just to determine overall sentiment in Bitcoin. Is Bitcoin looking bullish or bearish at the moment? Today, the answer is obvious but lots of times that’s not true and this is one technical analysis method you can use to help trade more profitably.