Sunday, June 1, 2014

Rules For Breakout

        There are few technical tools which can help increase the reliability of a breakout moving in the intended direction. By putting as many of these as possible together, traders can substantially improve their odds of success in trading breakouts of any kind. Here are few points we should look for on a breakout to help confirm that a substantial move is in the making (in order of importance):-

1. Breakout day closes over pivot resistance and occurs on a TBBLBG. TBBLBG stands for Thrust Breakout, Breakaway Lap, or Breakaway Gap. The day of the breakout should make one of these three runaway price action patterns. A Thrust is a large-range day where the close is in the top third of the range which occurs on volume higher than the previous day. A Lap up is a day where today's low is greater than yesterday's close. A Gap up is a day where today's low is greater than yesterday's high.

2. Breakout-day closes over pivot resistance and occurs on strong volume (20% more volume than the 50-day MA of volume, or, near record volume since the trading range began).

3. Breakout is confirmed by a higher level of relative strength than occurred since the trading range began. When a stock breaks out in price and also in its Relative Strength vs. other stocks, it is much more likely to be a true market leader and is more likely to follow through.

4. Prior to the breakout day, the trading range showed more accumulation days than distribution days. An accumulation day is a day where prices rise on volume higher than the previous day. A distribution day is a day where prices fall on volume higher than the previous day.

        The larger the number of these that confirm a breakout in price, the more likely that you've got a breakout that will move in the desired direction. In addition, most of the very strongest moves following breakout are accompanied by at least 2 to 3 of these characteristics.

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