The range and the breakout
A range is a period when the price is boxed between a floor it bounces off and a ceiling it turns back from. A breakout is a close outside that range. The idea is that leaving a long quiet period may start a new move, because the balance between buyers and sellers at that price has shifted.
Conditions many people use: a clear range that lasted long enough, a close above the ceiling rather than a brief touch during the session, and higher than usual volume on the breakout day. Weak volume sometimes means the move was made with small quantities and has little behind it.
A worked example
The false breakout
Many breakouts slip back inside the range within a day or two, and that is one of the best-known ways this strategy fails, with a lesson of its own: real and false breakouts. This lesson covers the upward breakout; a downward break is the mirror image, but handling it depends on the strategy and on whether you can sell. Waiting for confirmation, such as a second close above the ceiling, may cut some false signals, but you enter higher and give up part of the move. No choice is free; what matters is choosing before the trade.
Check the volume yourself
Open any stock page and compare today's volume with its recent average. That is the first question before calling any move a breakout.
Check yourself
1. The range is 8 to 9. Which is closer to a breakout?
2. You enter at 9.30 with the exit at 8.80. What is the distance per share?
Summary
- A breakout is a close outside a clear range, preferably on above-average volume.
- Entering early brings more false signals; confirmation may cut some of them, at a higher entry price.
- The exit is a return inside the range, and the size is worked out from that distance.