Most patterns that form have breakouts. Many books and articles recommend buying or selling after a break of the resistance or support. I understand this is needed for confirmation, but it seems like the breakouts are up or down 5%-10%. How do you place a stop loss? How should one buy (or sell) breakouts with proper risk management?

Let’s start with the first statement, “Most patterns … have breakouts.” In the broadest sense, this is true, but is that “breakout” tradable? For example, a low-price, low-volume range-bound market that moves only 2% between high and low is a tough market to trade when looking for breakouts.

The second statement that “… books and articles recommend buying or selling …” is a general statement that applies in the abstract only, and as any trader will tell you, trading decisions are made in the concrete reality of the moment. The point is that general notions are good for educational purposes, but the makeup of the potential trade itself defines how you trade.

It is true as well, that breakouts can confirm the beginning of a new trend up or down, but not always. Sometimes the breakout is a “tease.” The move is temporary and the market moves back into its comfortable range. The key here is to define what you are looking for in a breakout. If you are trading longer term, you might want to see a breakout that holds for a day or two before you buy or sell. If you are trading pivot to pivot (swing), a breakout might tell you that particular trading opportunity is over. If you are intraday or day trading, the breakout just might be your profit.  

As to your question, the point of all the above is that I cannot answer your question concretely because I know nothing of how you trade, and giving advice in the general sense is, well, general. So, here is my advice. Track some high-price, high-volume markets that are range-bound (not hard to do these days). Make sure they are good candidates for a breakout. Study them when they do breakout. Look for the both the strength of the breakout (volume) and track the percentage movement. If you were trading it, was there room in the breakout to get in or out with a decent profit?  The good thing about patterns is that they tend to repeat, so studying breakout patterns can only help you become better at trading breakouts.

Finally, I am happy you referenced stop-loss and risk management. See yesterday’s article if you want to know what I think about how you define the risk/reward or profit/loss aspect of trading.  I believe this will help you understand how to decide where to place your stops.

Trade in the day; invest in your life …

Trader Ed