Breakout Trades
The breakout trade is one of the simplest and most well known of all trades and yet it can be an excellent trade with good potential risk-reward ratios. However, the fact that it is well known has its draw-backs, See "False Break-out" below.

The basic idea is that if the market has been trading in a well defined range, then if it breaks out either above or below this range a new move has started and one should get on board. One is buying "high" and selling "low" in terms of recent market action but one is hoping to sell "higher" or buy back "lower". If the market moves back into the trading range then the break-out has "failed" and one should get out. This means that one has a well-defined stop loss level with good potential reward if the move takes off.

False Break-out
The trouble with playing break-outs from a trading range is that everyone knows about them. This means that there is likely to be a large number of stops placed outside the range. This results in severe slippage on trade entries. It also means that the floor traders may try to push the market up or down to hit these stops if things are a bit quiet, either exiting their positions into the stop orders or even taking the other side of the stop orders if they are sure that the break-out will not follow threw. This leads to what is known as a "false break-out" where the market pokes it's head outside a range and then reverses back sharply. This is an example of a market test, that we discussed earlier in the talk, where the market has a look outside a know support or resistance level, discovers that there is no new business there and then reverses sharply. Trading the other side of a false break-out can be very profitable indeed and you have a well defined stop level, that being the extreme that the market traded to when it tried to break out.

In the above chart you could buy the Bund on the false break-out at around 96.63 with a stop below the low at 96.50 and ride it all the way up to 97 and beyond as the market then makes a genuine break-out above the range. The idea is that the market has tried and failed to move lower so that there is then only one way to go and that is up.