What is a breakout?
A breakout is when the price passes a level that stopped it before: resistance above, or support below. If the price stays beyond the level and carries on, we call it a real breakout. If it quickly returns to the other side, we call it false. The trouble is that at the moment the price crosses, the two look exactly alike.
Three signs that help
The first sign: in the method this academy uses, we rely on a close beyond the level, not a mere touch or the session high, as the stronger condition for a breakout. A price can poke through a level for a few minutes and fall back. The second is volume: a breakout on clearly above-average volume means trading activity is higher than usual. That gives the breakout extra weight, but on its own it does not tell you how many people took part. The third is holding: the price stays beyond the level for a few sessions, sometimes coming back to test it from the other side and bouncing.
The cost of waiting
The more confirmation you wait for, the fewer false breakouts catch you, but the further the price has moved from the level. In the second example, someone who waited for two closes above resistance saw the price at 15.80 instead of 15.60, about 1.3% further. There is no single right answer; each person picks the balance that fits their plan.
Review a past breakout
Open any stock chart and find a time it passed a clear resistance. Apply the three signs: did it close above, was volume above average, did it stay above?
Check yourself
1. Resistance at 30.00. The stock hit 30.60 during the session and closed at 29.80. What is this?
2. Average volume is 200,000 shares; on breakout day 500,000 traded. How many times the average is that?
Summary
- In the method used here, a breakout is judged by the close beyond the level, not the touch.
- Above-average volume and holding afterwards are signs that cut false breakouts.
- More confirmation comes at a later price, and no sign removes false breakouts completely.