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Lesson 03 · Breakout

Breakout Trading Strategy: Support and Resistance Breakouts

  • 12 short cards
  • About 5 min to read
  • 5 quiz levels · 30 questions
  • Beginner

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Overview

This breakout trading strategy looks for a sideways market with a clear floor and ceiling. When price closes firmly above the ceiling, you buy, hoping the break starts a strong move. This lesson also teaches how to judge whether any strategy can make money.

Timeframe
1-hour to daily charts
Markets
Shares, indices, forex, commodities
Difficulty
Beginner

Builds on: Trading for Beginners: The Basics, Position Sizing and the 1% Rule in Trading

See it on a chart

100105110Resistance 104Support 98Measured move 110Breakout
  • Price (candles)
  • Long signal
  • Resistance
  • Support
  • Target

Price moves sideways between 98 and 104, then closes above 104. The target adds the height of the range (6) to the breakout level. Prices are made up for illustration.

What are support and resistance?

In a sideways market, price often bounces between the same two levels1.

Resistance is a ceiling: a price where selling has stopped rises before. Support is a floor: a price where buying has stopped falls before.

The more times a level has held, the more traders watch it. Many place orders just beyond it.

98100102104Resistance (ceiling) 104Support (floor) 98
  • Price (candles)
  • Resistance
  • Support

A sideways market: price keeps turning down near the resistance ceiling at 104 and back up near the support floor at 98. Each touch makes the level more widely watched.

What is a breakout?

A breakout happens when price closes firmly above resistance or below support. It suggests the balance between buyers and sellers has changed.

Breakouts can speed up because orders were waiting there. Traders who went short below resistance often have stop losses just above it. When price breaks through, those stops buy, adding fuel.

A common target is the measured move: add the height of the range to the breakout level1. A range from 98 to 104 is 6 points high, so the target is 104 + 6 = 110.

Worked example: the measured-move target

Resistance (top of the range)
104
Support (bottom of the range)
98
Height of the range: 104 − 98
6
Add it to the breakout level: 104 + 6
110
Target
110

The idea: after a breakout, price often travels about as far again as the range was tall.

False breakouts and how to avoid them

Breakouts often fail. Price pokes through the level, then falls back into the range. This is called a false breakout.

Ways to reduce false breakouts: wait for a candle to close beyond the level, not just a wick; look for volume above normal; or wait for a retest, where price comes back to the broken level and bounces off it. Old resistance that now acts as support is called role reversal1.

A breakout you can trust, or a false one?

Stronger signs

  • A candle closes above the level
  • Volume is above normal
  • Price comes back, holds the level (a retest) and bounces

Warning signs

  • Only a wick pokes above the level
  • Volume is low
  • Price closes back inside the range

Win rate, reward-to-risk and expectancy

Every strategy needs three numbers. Win rate is how often you win. Reward-to-risk compares the size of your target with the size of your stop, so a target twice as far away as your stop is 2-to-1. Expectancy is the average result per trade, in R2.

Expectancy = (win rate × average win) − (loss rate × average loss). If you win 40% of trades and wins average 2.2R while losses average 1R, the expectancy is 0.4 × 2.2 − 0.6 × 1 = +0.28R per trade.

This is why a strategy that loses more often than it wins can still make money, as long as the wins are big enough.

Worked example: expectancy over 10 trades

4 wins, each about +2.2R
+8.8R
6 losses, each −1R
−6.0R
Total over 10 trades
+2.8R
Expectancy: +2.8R ÷ 10 trades
+0.28R a trade

It loses more often than it wins, but the wins are big enough to come out ahead. If you risk £100 a trade, that’s about £28 a trade on average, before costs.

Breakout trading rules

Entry

  • Find a sideways market that has touched both support and resistance at least twice.
  • Buy when a candle closes above resistance (or sell short when one closes below support).
  • Better if volume is above normal. Or wait for a retest that holds.

Exit

  • Target the breakout level plus the height of the range.
  • Move the stop up once the trade is 1R in profit.
  • Get out if price closes back below the middle of the range.

Risk

  • Put the stop below the breakout candle’s low or the middle of the range.
  • Skip breakouts that run straight into another nearby ceiling on a longer timeframe.
  • Size the trade with the 1% rule.

Worked example: a range breakout in a share

  1. A share has moved between £98 and £104 for seven weeks, touching each level three times.
  2. It closes at £105.20 on twice its normal volume. You buy at £105.20.
  3. Your stop goes below the breakout candle’s low, at £102.80: £2.40 of risk per share.
  4. The target is £104 + £6 = £110. That is £4.80 away, twice your risk: a reward-to-risk of 2-to-1.

Pros and cons of breakout trading

Strengths

  • Clear levels and clear rules.
  • Can catch the start of a big move.
  • Gives a natural target from the range height.

Weaknesses

  • False breakouts are common, so many trades lose.
  • Fast moves through a level can cause slippage.
  • Obvious levels attract lots of stop orders.

Key terms

Support / resistance
A price floor where buying has appeared before, and a ceiling where selling has appeared before.
Breakout
A firm close beyond support or resistance.
False breakout
A move beyond a level that quickly falls back into the range.
Measured move
A target found by adding the range height to the breakout level.
Retest
Price coming back to a broken level to test it from the other side.
Expectancy
The average result per trade, in R.

Sources

Numbers in the lesson, like 1, point to these sources.

  1. Murphy, J. J. (1999), Technical Analysis of the Financial Markets. Book (New York Institute of Finance).
  2. Tharp, V. K. (2007), Trade Your Way to Financial Freedom, 2nd edition. Book (McGraw-Hill).

Lesson complete

You have reached the end of the lesson. Now test what you learned with the five-level quiz.

Start the quiz

Quiz zone

Test yourself: Support and Resistance Breakout quiz

Five levels, from the basics to expert judgment. Clear each level to unlock the next.

  1. Level 1: Foundations. Recognise the strategy and its vocabulary.
  2. Level 2: Mechanics. Know how the signals and rules work, and why.
  3. Level 3: Application. Apply the rules to realistic chart situations.
  4. Level 4: Numbers & risk. Size, measure and manage the trade with real calculations.
  5. Level 5: Mastery. Judge edge cases, failure modes and market conditions.

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See all 30 questions in this quiz

The questions only. Answers and explanations appear when you take the quiz above.

Level 1: Know support, resistance and breakouts

  1. What is resistance?

    • A price floor, where buying has stopped falls before
    • A broker’s limit on how much you can buy
    • The highest price a share has ever reached
    • A price ceiling, where selling has stopped rises before

  2. An upward breakout happens when price…

    • touches resistance for the third time
    • closes firmly above resistance
    • falls to support
    • has a wick above resistance, then closes below it

  3. True or false: a level that has held several times is usually watched by more traders.

    True or false?

  4. What is a false breakout?

    • A breakout on a day with no trading
    • A level that nobody watches
    • A breakout that reaches its target
    • Price moves beyond a level, then quickly falls back into the range

Level 2: Understand breakouts and expectancy

  1. Why do many traders wait for a candle to close beyond the level before buying?

    • Brokers only accept orders at the close
    • The close is always the high of the day
    • Closing prices are cheaper
    • A close shows price held there. Wicks beyond a level often snap back

  2. Why can a breakout speed up once the level breaks?

    • Prices always speed up after lunch
    • Because the range was too wide
    • Stop losses and buy orders waiting just beyond the level all trigger together
    • Brokers push the price up

  3. True or false: a strategy that loses more trades than it wins can still make money.

    True or false?

  4. Your target is £3 away and your stop is £1.50 away. What is the reward-to-risk?

    • 4.5-to-1
    • 1-to-2
    • 2-to-1
    • 3-to-1

  5. What is support?

    • A price ceiling, where selling has stopped rises before
    • A price floor, where buying has stopped falls before
    • Help from your broker
    • The average price of the range

Level 3: Use the rules

  1. The range is £98 to £104. During the day price spikes to £105.50, but it closes at £103.40. Under these rules, what happens?

    • Buy at £105.50
    • No trade: it closed back inside the range
    • Buy at £103.40
    • Sell short at £104

  2. After a close above £104, price dips the next day to £104.10 and bounces. What is this?

    • A retest: old resistance acting as support
    • A false breakout
    • A sign to sell short
    • A gap

  3. The weekly chart shows a strong ceiling at £106, just above your daily breakout at £104. Your target is £110. What’s the concern?

    • Price may stall at £106 before it reaches £110
    • The weekly chart is always wrong
    • The target should be £106 + £6 = £112
    • There’s no concern

  4. You bought the breakout above £104. Now price closes at £100.50, back inside the range. What do you do?

    • Move your stop lower
    • Wait for it to get back to £110
    • Get out: the breakout has failed
    • Buy more, it’s cheaper now

  5. A breakout candle closes above resistance on twice its normal volume. What does the high volume suggest?

    • Nothing: volume never matters
    • Lots of traders are behind the move, which makes it more likely to be real
    • You should wait a month
    • The breakout will definitely fail

  6. Where do these rules put the stop loss?

    • Exactly at your entry price
    • Below the breakout candle’s low, or the middle of the range
    • Above resistance
    • At the measured-move target

Level 4: Work out targets, size and expectancy

  1. Support is £98 and resistance is £104. What is the measured-move target for an upward breakout, in pounds?

    Type a number.

  2. A share moves between £50 and £55, then breaks out upwards. What is the measured-move target, in pounds?

    Type a number.

  3. You buy at £105.20 with a stop at £102.80 and a target of £110. What is the reward-to-risk? Type the first number of “? to 1”.

    Type a number (to 1).

  4. Your account is £15,000 and you risk 1%. You buy at £105.20 with a stop at £102.80. How many shares so that hitting your stop loses only 1%? Round down.

    Type a number (shares).

  5. You take 10 trades. 4 win +2R each and 6 lose −1R each. What is your total result, in R?

    Type a number (R).

  6. A strategy wins 50% of trades. Wins average 2R and losses average 1R. What is its expectancy, in R a trade?

    Type a number (R).

  7. A strategy wins 40% of trades. Wins average 2.2R and losses average 1R. What is its expectancy, in R a trade?

    Type a number (R).

Level 5: Judge breakout quality

  1. Price breaks out, but volume is half its normal level and the candle has a long wick on top. What’s the best judgment?

    • A weak breakout that may fail: wait for a retest or skip it
    • Sell short straight away
    • A strong breakout: buy more than usual
    • It doesn’t matter: a close is a close

  2. Before many upward breakouts, price makes higher lows while resistance stays flat. Why might that help?

    • Resistance gets weaker by itself over time
    • Buyers are stepping in at higher prices each time, wearing down the sellers at resistance
    • It always means a false breakout is coming
    • It means the share is cheap

  3. Many traders put stops just beyond obvious levels. What often happens there, and how can you protect yourself?

    • Use no stop at all
    • Nothing happens at obvious levels
    • Price pokes past the level, triggers those stops, then reverses. Wait for a close or retest, and don’t put your stop exactly on the obvious level
    • Put your stop exactly on the level, where everyone else has theirs

  4. Breakouts in your market fail 60% of the time, but the winners average 3R. Which approach fits these numbers?

    • Take profits at 1R so you win more often
    • Double your size after each failure
    • Keep losses small and steady, and accept frequent failures, because the winners pay for them
    • Stop trading breakouts: 60% failure is too many

  5. A strategy has a 2-to-1 reward-to-risk but only wins 30% of the time. Does it make money?

    • No: expectancy is 0.3 × 2 − 0.7 × 1 = −0.1R a trade
    • Yes: 2-to-1 is always profitable
    • Yes: it makes +0.6R a trade
    • You can’t tell without the share price

  6. Your breakout trade is now 1R in profit. What do these rules say to do with the stop?

    • Move it down to give the trade more room
    • Remove it
    • Leave it where it is until the target
    • Move it up

  7. Why is a measured-move target only a guide, not a promise?

    • It only works for short trades
    • Because the range height changes after the breakout
    • Price can stop short, overshoot, or reverse at another level
    • It’s always exactly right

  8. A strategy wins 70% of trades, but wins average 0.5R and losses average 1.5R. What’s the problem?

    • No problem: it wins most of the time
    • It needs more trades to work
    • The wins are too big
    • It loses money: 0.7 × 0.5 − 0.3 × 1.5 = −0.1R a trade

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