A breakout occur when price breaks a technical level. The breakout of a long lasting congestion zone usually gives the best trading opportunities. In these occasions, we don’t have to wait for a pullback, since the best breakouts never look back. Let’s take a look at the following chart, which presents a breakout of an evident resistance level.
Apparently the resistance has been violated to the upside, however, candlestick analysis comes helpful in evaluating a breakout quality in order to avoid any false signals.
An hypothetical breakout made by a spinning top underlines a lack of conviction on the buyers side. Let’s observe the previous chart, adding this new information. The breakout took place with a white spinning top, which also has a long evident upper shadow. This means that at the end of this session, sellers had re-gained much of the territory that they had lost during the day.
Therefore, the signal doesn’t appear to be very convincing and we need to wait for a confirmation candle. If the following trading session closes on the highs giving a new upward impulse, then it will be possible to enter on the long side, otherwise it will be better to wait and see.
In conclusion, breakouts are movements that it is necessary to examinate even from a qualitative standpoint.
Breakouts: When To Buy Buying a breakout without understanding where key price resistance levels are coming from is a bad idea. Buying breakouts against the current market trend usually does not work. Buying them in the direction of the overall trend has better odds of success. When you buy a breakout and it fails and falls back through the lows of the previous day, it is time to get out. If the lows of the breakout day are held, there is a good chance of a new range and new trend. Buying on the anticipation of a breakout before it actually happens is usually a bad idea. You should look for a confirmed breakout for better odds of success. Chasing a break out after a multiple day move is not a good idea. You need a profit cushion to enable a longer term hold. Buying breakouts in commodities and high growth stocks has a much better probability of success than in big cap stocks or indexes. By Stephan Burns