Breakout Strength Analysis

Breakout Strength Analysis: In-Depth Notes

1. Identifying Strong Breakouts

• Characteristics of Strong Breakouts:
  • Breakouts occur when price moves beyond established support or resistance.
  • Identifying strong breakouts is crucial for successful trading in Price Action.

1.1 Strong Bar Characteristics

• Large Breakout Bars:
  • Breakout bar should be 1.5 to 2 times larger than the median of the last 5-10 bars.
  • If the bar exceeds 3 times ATR, it may signal exhaustion.
• Closing Prices:
  • For bullish breakouts, aim for closure in the top 5-10% of the bar’s range.
  • For bearish breakouts, look for closure in the bottom 5-10%.
• Minimal Wick Size:
  • Ideally, the breakout bar is composed of at least 75% body with little to no tail on the breakout side, termed shaved closes if there’s no wick at all.
• Consecutive Strong Bars:
  • At least 3-5 consecutive strong bars should move in the breakout direction to validate strength.

1.2 Market Structure Confirmation

• Breakouts Past Key Levels:
  • Close above significant resistance (for bullish) or below significant support (for bearish). Tested levels strengthen breakout reliability.
• Close Above/Below Multiple Bars:
  • Bullish breakouts ideally close above 5-10 prior highs; bearish breakouts close below 5-10 prior lows.
• Tick Gaps:
  • Small gaps between bars indicate higher lows (bull) or lower highs (bear), showing momentum.
• Micro Gaps:
  • Third bar opens beyond the prior bar’s close without overlap.

1.3 Volume and Volatility Factors

• Volume Spike:
  • Breakout volume should exceed the 20-bar moving average. Strong volume indicates institutional participation.
• ATR Comparison:
  • Breakout bar should be 1.5-2x ATR of recent bars for significance; excessive size (>3x ATR) indicates possible exhaustion.

1.4 Follow-Through and Retests

• No Immediate Reversal Bars:
  • Retracement over 50% of breakout bar undermines strength.
  • Look for failed follow-through bars or engulfing bars in the opposite direction.
• Pullback Behavior:
  • After a breakout, any pullback should not retrace more than 50% of the breakout move to confirm strength. Higher low (bull) or lower high (bear) should hold.

2. Contextual Strength Factors

• Trend Context:
  • Align breakout with an established trend to enhance probability of continuation; countertrend breakouts are risky unless supported by reversal patterns.
• Higher Time Frame Confirmation:
  • Ensure alignment with trends in larger time frames (1-hour, 4-hour, daily). Breakouts against these trends are riskier.

2.2 Pre-Breakout Conditions

• Failed Attempts:
  • Multiple attempts (3+) at breaking a level before the actual breakout increase success likelihood.
• Tight Range Breakouts:
  • A breakout from a tight range often indicates sustained movement; flag patterns and spikes can also lead to second legs.
• Gap Breakout:
  • If a gap breakout occurs without immediate fill, it signifies increased reliability.

2.3 Time-of-Day Considerations

• Morning Breakouts:
  • First 90 minutes of trading often yield stronger breakouts.
• Power Hour Breakouts:
  • Last hour of trading may lead to continuation in subsequent sessions, especially with institutional support.

3. Summary Table: Measuring Breakout Strength

Final Thoughts

• By integrating bar-specific strength factors, volume confirmation, market structure, and contextual considerations, traders can markedly enhance their breakout analysis. Strong breakouts that comply with multiple strength criteria have a greater probability of producing a second leg, yielding high-probability trading opportunities.