Category Archives: the financial corner

Breakouts Defined

A breakout is defined as the first point after the pattern is formed (usually after two touches on both upper and lower trendlines) where the stock price pierces the trendline.
It should be noted that after a breakout, the stock might rise or fall by less than 5% and experience a throwback or pullback, in which case, the pattern is considered a failure.
Since breakout is typically where a trader will place a ‘buy’ order, it is important to know what the pattern failure rate is. The failure rate will vary somewhat between experts in the field, and will vary with pattern type. But as an average guideline, if the ‘buy’ order is placed after breakout, the failure rate is in the order of 15% or less. The reader is encouraged to consult the experts in the field for details in this and other areas.
Some traders consider breakout to be the moment when the stock price pierces the trendline, others consider a valid breakout to be only when a stock closes above the trendline, and still others wait for two successive days closing above the trendline. The choice is left to the reader.
One final note. Sometimes, since stocks are very perverse beasts, some will undergo a throwback after breakout. This throwback can be temporary, with the real price rise (or fall) delayed for up to 30 days. One technique to counteract this behavior is to place a re-purchase order whenever the stock reaches a stop loss, good for 30 days.


Figure 2 – Breakout

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