In the last chapter, we saw how Ranges could carry different types of information inside them. Whenever price breaks out of this range to resume a Trend, we call it a Breakout.
Best breakouts happen when they garner the interest of big Institutional players. Accumulation of price around a level is a telltale sign. That there is a large scale interest of big players. Indication of Accumulation: 1) Whenever price starts narrowing down while making smaller swings, or 2) Make a tight range near the extreme of a larger-range.
Breakout trades are a melting pot of activity, with high volatility and slippage. And it is not a bad sign, but a natural trait. Common signs that a Breakout trade is working 1) the First pullback after the trade is successful, 2) Pullback touches the previous level, and 3) Rapid price movement.
Many successful breakouts will have gap moves, showing violent momentum while crossing the level.
Price pulling back to “test” the level again before resuming the breakout is hard to explain. We don’t know precisely why this happens. One potential theory is that the market tends to eat stop losses, and once the price goes below the majority of these stops, the price resumes its original trajectory.
It shares its origin with the Impulse-Retracement-Impulse tendency that we had discussed before. And this non-random tendency of testing the level before resuming the breakout is a temporary retracement.
Failure of the breakout is when the subsequent pullback forms a range or moves way back inside the original range.
Practically you can take the trade when the price breaks out of the range. Or you can wait for the first pullback after the price breaks out of the range. This first pullback can either continue in the breakout direction or quickly fail to move toward the original range.
I hope you’ve become the breakout ninja. In the coming chapters, we are going to explore so much more!