Breakout

Breakout trades are one of the most popular and profitable trade ideas. A breakout occurs when the share price moves out of a trading range or goes through a trend line. Basically, a breakout occurs when the share price 'breaks' through a support or resistance line.

This type of trade is very simple to use, however traders must be careful that the share price doesn't whipsaw around and the trade becomes a false breakout. A whipsaw occurs when the share price and technical indicators are showing that there is a breakout occurring but the share does the opposite of what is expected. Many traders apply a 3 to 5% rule whereby when the share price breaks out of a range the price would have to move at least by that amount for the movement to be more likely to continue. Other traders look at the volume on the breakout, increased volume on a breakout is better than low or normal volume.

Practical Example

The chart below is of Woodside Petroleum Ltd, WPL, from February to early June 2007.

As you can clearly see in the chart above WPL consolidated from late March to early May. The breakout occurred in the highlighted yellow area. The corresponding volume is highlighted in aqua. As you can clearly see, once the share price broke on the upside it continued in that direction for a number of days.