#02 How To Correctly Identify A Breakout

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by Mike Lally

You can adopt four very simple steps to confirm a breakout from a trading range:

BALL_PURIf you have the software, display the support and resistance lines
BALL_PURObserve whether the breakout has penetrated the resistance line (risen above)
BALL_PURCheck the volume levels
BALL_PURLook for confirmation when price re-tests the resistance line

When creating support and resistance lines be careful to get them as accurate as possible since they will be your guide to determine whether a breakout has indeed occurred.
Support and resistance lines initially provide potential entry and exit levels.

The resistance level indicates there has been a lot of action at this price area.
This line will usually get re-tested after a breakout has happened.
Make sure that there are several points of price in the resistance line.

Do not ignore closely situated isolated highs.
A line drawn across the top of the congested price is the resistance line and it reveals precisely the region where there has been ample supply.

If the price has failed to penetrate the resistance level it is not a breakout and will likely stall or fail.

It is often worthwhile checking the volume not only during the breakout day itself but prior days, and after the move has taken place.

If the volume is greater than the average daily volume it is a good sign.
If the volume is greater by a factor of two, all the better.
Volume at these levels will usually confirm the breakout because many other traders are sure to hop abroad.

Monitor the trade very carefully.
When prices penetrate above a resistance level, it initially becomes a fragile support level.

If price re-tests this level and then bounces back up you can assume you have confirmation of the breakout.

If the price gaps up past the resistance line it is a good sign.
The following days or days will confirm if this is the case.

If the price quickly retreats back into the trading range it is likely to be a false breakout.

Check if a faster moving average has crossed above a slower moving average for an additional confirmation signal.

Prudent traders and investors could consider setting a stop at the old resistance line which will now act as support to prevent loss of money if a sudden reversal in price occurs.

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