How To Use Volume And Technicals To Improve Reliability And Profitability Of Breakouts By Mark Boucher Investors following a strategy similar to the one I teach here at TradingMarkets.com, as well as those who follow an O'Neil type strategy, are apt to be buying breakouts to new highs frequently. If you're going to be buying breakouts of four-week-plus flags or five-week-plus cup-and-handles, you need to know all the variables that can help you improve the percentage of these trades that are profitable and/or can help you highlight stocks that have a higher likelihood of moving substantially higher following a breakout. Fortunately, there are a number of technicals that can help a trader in this regard. This month, we'll cover five technical tools that our research shows help increase the reliability of a breakout moving in the intended direction. By putting as many of these as possible together, traders can substantially improve their odds of success in trading breakouts of any kind. Here are the top five things we look for on a breakout to help confirm that a substantial move is in the making (in order of importance): 1. Breakout day closes over pivot resistance and occurs on a TBBLBG. The most important variable is the price action made on the day of a breakout. TBBLBG stands for T hrust Breakout, Breakaway Lap, or B reakaway Gap. The day of the breakout (a new four-plus week high in price) should make one of these three runaway price action patterns. These patterns are described in my 10-week trading course. For a quick review, a Thrust is a large-range day where the close is in the top third of the range which occurs on volume higher than the previous day. A Lap up is a day where today's low is greater than yesterday's close. A Gap up is a day where today's low is greater than yesterday's high. (See Figure 1.) Figure 1. 2. Breakout-day closes over pivot resistance and occurs on strong volume (20% over 50-day MA or near record volume since the trading range began.) The second most important variable is the volume action on the day of breakout. You definitely want strong volume on the day of the breakout to show significant demand is coming in. Demand volume at least 20% above the 50-day MA of volume on your breakouts and your odds will improve. Strong volume can also be defined as the very highest volume since the trading range started. (See Figure 2.) Figure 2. 3. Breakout is confirmed by a higher level of relative strength than occurred since the trading range began. When a stock breaks out in price and also in its Relative Strength vs. other stocks, it is much more likely to be a true market leader and is more likely to follow through. (See Figure 3.) Figure 3. 4. Prior to the breakout day, the trading range showed more accumulation days than distribution days. An accumulation day is a day where prices rise on volume higher than the previous day. A distribution day is a day where prices fall on volume higher than the previous day. A strong stock will show more accumulation days than distribution days during its trading-range consolidation prior to breakout. The second chart of ACRT is an example. If you count up-volume days that are more up vs. up-volume days that are down, there are three more up-volume days that are up than down prior to the breakout day. (See Figure 4.) Figure 4. 5. One or more of four volume accumulation indexes breaks out to a new high (new high prior to trading range) before the breakout day in price. We use Money-Flow, OBV, William's Accumulation, and Volacc as volume accumulation indexes (see Science of Trading Course). If you have access to any of these, check to see that your stock has at least one of these volume accumulation indicators breaking out to new highs ahead of price. (See Figure 5.) Figure 5. The larger the number of these that confirm a breakout in price, the more likely that you've got a breakout that will move in the desired direction. In addition, most of the very strongest moves following breakout are accompanied by at least 3/5 of these characteristics. While these confirmation tools will help you trade any type of breakout, they work particularly well on high RS high EPS stocks breaking out to new highs, such as those we trade and those O'Neil trades. So before you get too excited about a four-week-plus flag or cup-and-handle breakout in a strong RS and EPS stock in a leading group, check these five features and be sure you have at least one of these in your favor, and preferably two or more. Copyright © 2001 by TradingMarkets.com, Inc. . How To Use Volume And Technicals To Improve Reliability And Profitability Of Breakouts By Mark Boucher Investors following a strategy similar to. apt to be buying breakouts to new highs frequently. If you're going to be buying breakouts of four-week-plus flags or five-week-plus cup -and- handles,