Hi[wlm_firstname],

There are only two ways to trend trade – on a breakout or on a pullback. Each has its advantages and disadvantages.

Generally, traders prefer one method over the other and tend to stick with the one they’re comfortable with. Others like to have both types of strategy to hand and will choose to use the one they feel is most appropriate to the situation.

What is a breakout?
A breakout can be defined in one of two ways:
• A break beyond the previous bar
• A break beyond a previous pivot point

In the first definition, a breakout is price moving higher than the previous bar (in an uptrend) or lower than the previous bar (in a downtrend). Price is making a new high or new low and has thus broken above/below the previous bar.
In the second definition, a pullback has to occur for price to subsequently make a higher high (in an uptrend) or lower low (in a downtrend). The pullback can be anything from a single bar to a minor or major pivot – or even consolidation. Once price has broken above the pivot high (in an uptrend) or below the pivot low (in a downtrend) then price can be said to have broken out.

What is a pullback?
A pullback is a small but defined counter-trend move. If the counter move cannot be quantified as a pullback then price has either gone into consolidation or a trend reversal.
• It should not be more than 30 bars (although up to 60 is permissible) in duration
• The extreme should not breach major pivot points or strong zones of support/resistance.

We looked at how to identify a pullback in lesson five when considering the differences between pullbacks and consolidation. And we examined chart and candlestick patterns in lesson seven to help recognise common pullback criteria.

Identifying a breakout
Breakouts are straight forward to identify - regardless of your chosen definition. If you want price to make a higher high, or lower low, than the previous bar you just have to see if price obliges. If you want it to break a minor pivot, major pivot, or other area of support/resistance then, again, you just have to wait and see if price surpasses the previous price.

Although breakouts are simple to recognise this does not make them easy to trade.

Firstly you must protect yourself from being triggered into a fake breakout (see lesson six). This is essential to breakout traders. Avoiding as many fake breakouts as possible will help preserve your capital.

Second, price is likely to retrace at some point – which could be beyond your entry level. This is only likely to happen within the early stages of you entering a trade – once the trend becomes more established price will have moved a safe distance away. But at the beginning your position may move in and out of negative equity for several days or weeks. So you need to allow plenty of room by keeping your stops at a safe distance.
Consider these following rules if you want to trade breakouts:
• Wait for the body of the candle to breakout (not just the wick)
• Look for the bar to be bullish (in an uptrend) or bearish (in a downtrend)
• Only trade in the direction of the trend
• Trade with sufficient size stops to allow for the natural movement of the markets
• Trade longer-term

Identifying a pullback
Identifying pullbacks can be tricky. Sometimes they can be over before they’ve begun (in the case of a one bar pullback) and other times the extreme looks like it’s been reached (a reversal candle in addition to a chart pattern) yet price continues deeper – maybe into a consolidation or trend reversal.

Although pullbacks are more difficult to identify than a breakout there are a couple of safety measures you can put in place.

First, many pullback traders will protect their capital by placing their stop just beyond the reversal bar and then wait for price to break above the bar (in an uptrend) or below the bar (in a downtrend) by a reasonable margin. If they are wrong their risk is reduced by the tight stop.
Second, you should look for multiple support (in an uptrend) or resistance (in a downtrend) points. The more reasons price has to reverse back in the direction of the trend the better. Trendlines can be used, but a trend has to be well established and linear before they can be relied upon.
Consider these following rules if you want to trade pullbacks:
• Understand continuation chart patterns and reversal candlestick formations
• Have a checklist of the multiple reversal criteria required, including
 Trendlines
 Minor and major pivots
 Moving averages as support/resistance
 Round numbers
 Annual and 52 week highs/lows
• Keep stops tight in case the pullback deepens

An overview of breakouts and pullbacks
Breakouts and pullbacks both have their advantages and disadvantages.
• Breakouts are easier to identify while pullbacks give the trader the opportunity to gain more pips/points
• Breakouts mean the momentum is with the trend while pullbacks could retrace further
• Breakouts need wider stops while pullbacks can reduce monetary risk by having tight stops

Deciding whether to trade just one or both does not need to be set in stone. As your skills develop you may discover you find more success with one method or the other.
In lesson ten, we will be taking this a stage further to see how we can enter and manage our trades to the best advantage.