Breakout is considered one of the most common techniques used in the market to trade and lies in identifying a key price level and then buying or selling as the price breaks that predetermined level. The concept of a breakout is relatively simple and requires a moderate understanding of support and resistance.
The expectation is that if the price has enough force to break the level then it will continue to move in that direction.
Breakout trading ensures that you never miss the move, when the market is moving strongly in one direction.
This technique is used when the market is already at or near the extreme high / lows of the recent past. The expectation is that the price will continue moving with the trend and actually break the extreme high and continue. With this in mind, to effectively take the trade we simply need to place an order just above the high or just below the low so that the trade automatically gets entered when the price moves, which are called limit orders.
When the market is not trending, it is important to avoid breakouts, as it will result in false trades and losses.
The reason for losing is that the market does not have the momentum to continue the move beyond the extreme highs and lows. When the price hits these areas, it usually then drops back down into the previous range, resulting in losses for any traders trying to hold in the direction of the move.