A breakout occurs when price escapes a period of consolidation — a range, triangle or tight band — with force. The idea is that once price clears a well-defined level, a new move can begin as trapped traders exit and momentum traders pile in.
What a good breakout looks like
Quality breakouts tend to come after a tight consolidation and break with a strong, wide candle that closes clearly beyond the level. A break that stalls immediately, or breaks on a small indecisive candle, is more likely to fail. Context helps too: breakouts in the direction of the higher-timeframe trend are generally more reliable.
Entry and stop logic
There are two honest approaches: enter on the breakout candle close beyond the level, or wait for a retest of the broken level and enter there with tighter risk. Either way, a logical stop sits back inside the range, because a return there means the breakout has failed.
- Aggressive: enter on the close of the breakout candle.
- Conservative: wait for a retest of the broken level (see the Retest module).
- Stop: just back inside the consolidation the breakout left.
- Target: a measured move or the next significant level.
Trade breakouts that leave tight ranges with force — and always know the price at which the breakout is proven wrong.
Breakouts fail often, which is exactly why the fake breakout has its own module. No breakout is guaranteed, so position size and stops are what keep a losing breakout small.