Breakout Strength Analysis

Breakouts: Identifying and Analyzing Strength

Key Concepts in Breakout Strength

• Breakouts are pivotal moments in price action trading, leading to possible strong trends or reversals.
• Not all breakouts have the same strength; some succeed while others fail quickly.
• Identifying strong breakouts is crucial for high-probability setups.

Criteria for Strong Breakouts

Core Characteristics of a Strong Breakout

1. Strength of Individual Bars

   • Large breakout bars: Ideally 1.5 to 2 times the size of the median of the previous 5-10 bars.
   • If the bar exceeds 3x ATR (Average True Range), it may signal exhaustion.

2. Closing at Extremes

   • Bullish breakout: Closes in the top 5-10% of its range.
   • Bearish breakout: Closes in the bottom 5-10% of its range.

3. Minimized Wicks

   • Strong bars should have at least 75% body and little to no tail in the breakout direction.
   • Best breakouts have shaved closes (no wick in breakout direction).

4. Multiple Consecutive Strong Bars

   • At least 3-5 strong consecutive bars in the breakout direction are ideal.

Market Structure Confirmation

5. Breakout Past Key Levels

   • Closes should be above significant resistance for bullish or below support for bearish breakouts.
   • Levels should be tested multiple times before breakout.

6. Closes Above/Below Multiple Prior Bars

   • Bullish: Closes above 5-10 prior highs.
   • Bearish: Closes below 5-10 prior lows.

7. Tick Gaps Between Bars

   • Small gaps indicate a strong momentum with higher lows (bulls) or lower highs (bears).

8. Micro Gaps

   • The third bar opens beyond the second bar's close without overlapping.

Volume and Volatility Factors

9. Volume Spike

   • Breakout volume should exceed the 20-bar moving average.
   • Confirmed with strong bars indicating institutional participation, enhancing reliability.

10. Bar Size Relative to ATR

    • Should be 1.5x to 2x the ATR of recent bars; greater than this might indicate exhaustion.

Follow-Through and Retests

11. No Immediate Reversal Bars

    • Retracement exceeding 50% of the breakout bar indicates weakness.
    • An engulfing bar may signal uncertainty.

12. Pullback Holding Key Level

    • Pullbacks should not retrace over 50% of the breakout move.
    • Higher low (bullish) or lower high (bearish) confirmations are beneficial.

Contextual Strength Factors

Trend Context

13. Direction of Strong Trend

    • Breakouts should align with established trends for better success probability.

14. Higher Time Frame Confirmation

    • Align breakout with 1-hour, 4-hour, or daily trends to reduce failing chances.

Pre-Breakout Conditions

15. Multiple Failed Attempts

    • A level tested thrice or more before breaking indicates a higher chance of success.

16. Breakout from Tight Ranges

    • Breakouts from tight ranges or flag patterns suggest more sustained moves.

17. Gap Breakouts

    • Successful gaps that remain unfilled in the first bars boost reliability.

Time-of-Day Considerations

18. Morning Breakouts

    • Breakouts in the first 90 minutes tend to be stronger.

19. Power Hour Breakouts

    • Late-session breakouts often carry momentum into the next session, especially if backed by volume.

Summary Table: Measuring Breakout Strength

Final Thoughts

• Combining criteria related to bar strength, volume, market structure, and contextual factors significantly enhances breakout analysis.
• Meeting multiple strength criteria increases the likelihood of a second leg and provides high-probability setups for traders.