Breakout trading can very effective if used properly. During my years as a day trader it was my most utilized methodology. There are many different ways to trade breakouts, but they all have one thing in common. There is a break of some type of boundary. In other words, a break of some sort of support or resistance.
I'll show you some methods on this page, but I go into much greater detail on this type of methodology on my Day Trading Strategies page.
Tight stops are required with these trades in order to maintain a reasonable risk to reward ratio on your trades. Generally, a stop under the breakout bar will suffice unless the low of the bar is too close to the line of resistance (in the case of an upside breakout). If that's the case, a stop further away from the entry and resistance might be warranted.
This is a price action strategy. No indicators are necessary. Volume can help to determine whether or not breakouts will last, but for me price was always more important. I've seen too many breakouts go on to nice profitable trades on just average volume to put too much empasis on it.
However, it's reasonable to consider exiting a trade early if breakout volume is very light and especially if you see volume increasing as price is moving back towards the breakout point. That might indicate stronger traders fading the move back inside support or resistance.
Again, generally you should see volume increase on a breakout, then decrease as price makes it first pullback and then increase again, as it make its next move away from your entry point.
OPENING RANGE BREAKOUT TRADING
One very popular method of trading breakouts is the 30 minute opening range breakout. With this method you are determining support and resistance with the use of time.
In this case 30 minutes. Any time period can be used, but the reason 30 minutes is popular is that during the first thirty minutes, stocks are often digesting news, testing support and resistance boundaries, and forming a range before moving on to higher highs or lower lows.
In this first example below, PCL breaks out of it 30 minute range (yellow) and moves higher on increasing volume. Higher volume is generally what you'll see on successful breakouts. Notice how PCL's volume increased during the breakout and then decreased on the pullback to what used to be resistance and then became support.
On this next 30 minute opening range breakout example, ITT didn't breakout until around 11:30 am, but when it did it was with a huge increase in volume.
These opening range breakouts often occur within a lateral and I give details of a strategy and how to trade them here ==> Stock Trading Signals
MULTIPLE POINTS OF RESISTANCE OR SUPPORT
Some setups just scream for a breakout trade......like SWK below. If you spot a situation like this -- four or five points of resistance. Price is going to do something soon. Price is either going to breakout steeply, or fail miserably.
Either way, they provide very nice risk to reward ratio setups, because of their bottled up energy and forceful moves.
AFTERNOON BREAKOUT TRADING Example
During a strong bull market, excellent afternoon breakouts and 30 minute opening range breakouts can occur in many stocks on a daily basis. On any given day there's many stocks that breakout of a range, but come back inside.
But, what I'm referring to are stocks that breakout and don't look back.
Like with IGT below, you will see this afternoon breakout pattern occur in many stocks just about every day.
Sometimes it will be in conjunction with a 30 minute breakout, as well as multiple points of resistance.
During a strong bull market, you could limit yourself to just these two strategies alone and make good money, as long as you use proper day trading systems components and good trading money management.