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THE MARKET WHISPERER 29 5

How to Be a Breakout Winner

Trading at a breakout is a basic trade strategy. It is the most important and
the most used by traders. At the breakout, we expect to see fast movement
of prices beyond the technical formation. The assessment is that the
momentum of the breakout will lead the stock price to new highs which
will allow the trader to realize a profit. The breakout will always be in the
trend’s direction and never against it. Breakouts are usually accompanied
by high volume.

A breakdown is the reverse price action of a breakout. With breakdowns,
we execute shorts. Breakdowns also always occur in the direction of the
trend and never against it. To make the explanation more accessible, I will
focus on breakouts, but remember that the explanation in reverse is valid
for breakdowns.

In the section discussing formations, we learned that the breakout is
based on transitioning beyond the familiar technical formation. We must
plan the breakout at the stage where the formation is taking shape, and we
must remember that not every development ends with a breakout.

When we identify the breakout formation taking shape, we can plan
the entry point and the appropriate trade strategy. Intraday breakout is
planned for a short interval of seconds, minutes, or several hours, and
usually will be based on a technical formation comprised of five-minute
Japanese candles.

Swing traders planning on holding a trade for several days will plan
their breakout in the same way, but using daily candles instead.