Breakout Trading

Dear Reader,

While you are trading and following recommendation of many research houses, you must be reading technical reports and must have come across many jargon’s  clichés and specific words, which are either new to you or not understood the meaning or reason to behind the purpose of word or sentences.  In general human psychology is such that if you don’t understand something than it is either useless piece of material, or one step further its job of analyst to confuse your more.  We know it is not your fault, but it is the fact that many of the analyst try to give you unbiased view, where they like to stand on both the fronts, so irrespective of market takes any route their views held true, because they have given the possibility of both the moves. Any ways, we don’t like to delve much into it, in our series of Educational Articles, we attempt to educate our patrons, and make sure that whatever we convey, that should be fully understood by them, which helps to make them sound decision.

It is said and statistically proved that only 15-25% of time market trends, and rest of the time either it consolidates or give false breakouts and trade in choppy range.  If this is the case, than, it becomes difficult for any professional traders to trade the market, because there is little or no scope in range bound markets.  To solve this quandary or an alternate way to respond such type of market, many analysts have developed tools and oscillators, which can help you to take right decision, but that can only be applied with expertise and considering all the facts and figures into the account.  Simplest approach to this situation is trade only the Breakouts.

Breakout: – Stock that has consolidated against a price level for several bars.  The point where it breaks beyond that price level is called the “Breakout” and often is the beginning of a short to intermediate term move in the direction of the breakout.  Adding further to above statement, if price is consolidating for several bars and breaks beyond the price level on a downside than it is called as “Breakdown”.  This can be understood by below attached

Breakout Trading (a)

a)      Here price was consolidating in a horizontal range and gives breakout on an upside.  In such type of scenario, trader should always wait for real breakout to initiate the position i.e. initiate only after some minimum price movement in the direction of breakout.

Breakout Trading (b)

b)      This is a Rising Wedge formation in falling market, which is a continuation price pattern, well respected and traded in the market.  As we can see in the attached figure, price was falling up to one point and then started trading little higher, but the whole move proved nothing but distribution, than it gave a downside breakout after brief period which resumed its original falling trend with more vigour & intensity.  (There are total four types Wedges, detailed description is already available in our tutorial on Wedges).

Breakout Trading (c)

c)      It is a Flag pattern, another continuation price pattern.   These are small rectangles that form majorly on lower degree charts.  It is part of a fast moving market and signifies temporary halt in the trend that will continue the prior trend.  As we can see, on breakout price accelerates again on an upside.

Breakout Trading (d)

d)      It is another Flag, in falling market.  Crux remains the same; we have to wait for decisive price breakout on a downside.

Breakout Trading (e)

e)      Other than price pattern, trader should keep an eye on previous day’s High & Low.  Breakout from either direction gives excellent opportunity to trade.

Breakout Trading (f)

All breakouts are well traded if caught at a right time, with a sharp eye.  There are some Do’s & Don’t about Breakout trading


  • Before taking any breakout trade, you should always check back history of an instrument, to understand its particular behavior on breakouts.  It will be a highly useful key to increase the success ratio.
  • Breakout from resistance or support line, is best to trade, but make sure price have space to move beyond the range.


  • It advisable to wait for some decisive price move in the direction of breakout, otherwise you’ll get trap in the head fakes as you can see in attached figure (f).
  • If instrument has multiple resistances coming on its way just after the breakout, than avoid such trade, even if it has given ideal breakout from consolidation pattern, look for something else.

Generally, breakout trading is more suitable to intraday traders, who seat live on the market, or else you have strict watch on the market, if you are investor or occupied with some other work than it is not advisable to experiment such methods in your trading.

Keep trading…

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