Trading strategy · Momentum
Breakout Trading
Catch the explosion when a range finally breaks.
▶ Watch the free video lesson with TomWhat it is
After a period of consolidation, energy builds up. When price closes outside the range on strong volume, a new move often begins. Breakout traders buy the close above resistance, place the stop back inside the range, and target a move equal to the height of the range.
How it works
- Identify a clear range or consolidation with at least two touches on each side.
- Wait for a candle to CLOSE above resistance. A wick through it is not enough.
- Confirm with volume: real breakouts usually come with a surge in volume.
- Stop goes back inside the range, below the midpoint or below support for wider ranges.
- Measured move target: add the height of the range to the breakout level.
The rules
| Entry | Candle closes above range resistance on above-average volume. |
|---|---|
| Stop loss | Back inside the range (below the range low for small ranges). |
| Take profit | Breakout level + height of the range. |
| Filter | Longer, tighter ranges produce more reliable breakouts. |
Pros
- Catches the start of new trends
- Clear trigger and invalidation
- Strong momentum often follows
Cons
- Many breakouts fail ("fakeouts")
- Entries can be at poor prices after a big candle
- Stops can be wide
Common mistakes
- Buying the first wick above resistance before the candle closes
- Ignoring volume
- Chasing a breakout that is already far from the level
Lesson transcript
Lesson three: breakout trading. In the last lesson we traded inside a range. Today we trade the moment a range finally breaks, because that's often where the biggest moves begin. After a rally, this market goes quiet. It chops sideways between ninety five and one hundred. Buyers and sellers are in balance, and energy is building, like a coiled spring. The rule is simple, but strict. We don't buy when price pokes above resistance. We wait for a candle to close above it. Here it is. And look at the volume. A big surge. That's commitment. Our stop goes back inside the range. If price falls back in, the breakout failed and we want out. For the target, we measure the height of the range, five points, and add it to the breakout level. That gives us one hundred and five. Price runs straight through our target and keeps going. When a range breaks with real volume, the move is often as big as the range itself, or bigger. But I have to be honest with you. Many breakouts fail. Price pops above the level, traps the late buyers, then falls right back in. Traders call these fakeouts. That's why we wait for the close, check volume, and always use a stop. The rules. Enter on a close above the range with strong volume. Stop back inside the range. Target equals the range height added to the breakout. And favour long, tight ranges. The longer the squeeze, the stronger the release. Recap. Find a clean range, wait for the close, confirm with volume, and use the measured move. Next, we'll flip the script and learn to buy fear with the RSI.
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