Most traders have attempted to trade breakouts. The lure of catching a major move is so great that most traders cannot resist jumping on what they perceive to be breakouts, even though most breakouts ultimately fail.
This site is devoted to identifying high-probability breakout setups. We focus on two proven setups
The Pullback Expansion Setup
The first variation of the pattern works best when the trading day that completes the setup comes on the heels of a pullback in a major trending move. Traders push price to an extreme and then back away as the stock, option, or future becomes too expensive (in the case of a long candidate) or too cheap (in the case of a short candidate).
1. The precursor for pattern formation is a pullback in an uptrend.
2. The stock must break out of the pullback in the direction of the original trend. The move must represent the widest range of the past ten days, and volume should be higher on the breakout day than the average daily volume during the pullback.
3. On the trigger day, enter 10 cents above the high of the breakout bar.
4. Rules are reversed when shorting stocks.
The Consolidation Expansion Setup
Stock prices consolidate for a reason. Sometimes a particular market has reached equilibrium, while other times traders are trying to figure out whether to pile on or head for the door. Either of these motives can ultimately lead to substantial trading profits, if we are carefully watching for them. This second setup occurs when a consolidation breather ends and gives way to a sharp move either in the direction of the original trend, or counter to it.
1. The precursor for pattern formation is a discernible trend. The stock must stop trending and form at least a five-day consolidation range.
2. A break to the upside occurs, which takes price out of the channel either in the direction of the original trend or counter to it. The move must represent the widest range of the past ten days, and volume should be higher on the breakout day than the average daily volume during the consolidation period.
3. On the trigger day, enter 10 cents above the high of the breakout bar.
4. Rules are reversed when shorting stocks.