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Trading the breakout

Full-time trader and investor Michael Taylor explains how to trade stock breakouts
Trading the breakout

A breakout is a chart pattern where the price action ‘breaks out’ of a trading range set from the previous high. It is a well-known pattern and many traders look for breakouts because they offer high probability trading opportunities when deployed with sound risk-to-reward management.

The reason that breakouts are popular with traders across many asset classes, especially stocks, is because for a stock to make a new all-time high it has to have broken out of a previously traded range before – meaning that just a handful of uptrending stocks can provide ample breakout trading opportunities. Once the price has broken the previous resistance, it enters new territory, and the idea is that demand has now beaten back the supply of stock coming into the market at the resistance price. Therefore, a new trend is in the process of being established. 

 

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