One of my favorite setups in the entire stock market is the breakout.
A breakout occurs when a stock surpasses a key resistance level — a level the stock has previously struggled to move beyond.
Breakouts are a strong indicator that the stock is likely to continue its trend higher, you could be in at the beginning of something BIG…
But there’s a catch…
Sometimes, a seemingly perfect pattern eventually proves to be false breakout — when the chart cracks a key level, lulling traders into a trap, only to quickly drop back below it, taking everyone’s unrealized profits with it.
The key is understanding the difference between true and false breakouts — and trading accordingly.
With that in mind, I’m going to share five dangerous traps to avoid when it comes to trading a breakout pattern.
By steering clear of these pitfalls, you’ll put yourself in a much better position to catch the true breakouts (and avoid the false ones)…
Table of Contents
1. Don’t Ignore the Volume
When it comes to trading, price action is what pays, but volume is a very close second. Volume is the engine that drives the stock, and without enough of it, breakouts can fail. If a stock is breaking out on average or below-average volume, odds are it won’t continue higher because there aren’t enough buyers to sustain the move.
That’s why you need to focus on stocks with high-volume breakouts. A good rule of thumb is to check the 60-day average volume. If the stock isn’t trading at double, five times, or even 10 times that average volume during the breakout, it’s likely to stall.
While sideways action isn’t the worst outcome, it can get frustrating and lead to missed opportunities. To avoid that, always ensure the breakout has strong volume behind it.
2. Avoid Breakouts with No News
News is a powerful catalyst for breakouts. A stock might be breaking out on the chart, but without any solid news behind the move, there’s no guarantee it will continue higher.
You want to see substantial news — something that gives traders a reason to jump in. Earnings season is a prime example. Companies reporting strong earnings often see their stocks surge on the back of high volume and fresh buying interest.
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Other substantial news includes major product launches, contract wins, or partnerships. Avoid stocks breaking out on vague or fluffy press releases. If the news doesn’t have concrete details, like named partners or dollar amounts, the breakout might not last.
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3. Only Trade Hot Sectors
I say it all the time in Pre-Market Prep…
“Hot sectors, hot sectors, hot sectors!”
No matter what’s happening with market conditions, stocks in hot sectors often lead to the best breakout opportunities. We’ve all seen sectors like AI, EVs, crypto, and meme stocks heat up overnight at various times due to specific news events.
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Every day, there’s a new theme or story in the market, and by focusing on breakouts in hot sectors, you align yourself with the day’s momentum.
Remember, when you only have a limited number of trades available—especially if you’re under the PDT rule (Pattern Day Trader) — you want to focus on the best of the best. Choosing stocks in hot sectors increases your chances of catching a successful breakout.
4. Watch the VWAP
Afternoon breakouts are some of my favorites, but you need to be careful when the stock is trading under VWAP (volume-weighted average price) late in the day.
VWAP is a great technical indicator that helps you gauge the strength of the stock throughout the trading session.
If the stock is under VWAP going into the afternoon, it’s often better to wait. Stocks below VWAP may open weak the next day, and you could end up getting a better entry price after the opening dip.
This isn’t a hard and fast rule, but it’s something to consider before risking your money on a breakout that doesn’t have the support of VWAP behind it.
On the flip side, you should closely monitor stocks that stay above VWAP into the afternoon as they could lead to a beautiful VWAP Hold, High-of-Day Pattern.
5. Zoom Out to Multi-Year Charts
Lastly, don’t get caught up in short-term charts. While a stock might look like it’s breaking out on a five-day or one-month chart, you need to zoom out to the one-year, two-year, or even five-year charts to see the big picture.
Resistance from long-term consolidation areas can easily turn a promising breakout into a failure. For example, a stock may break out on a shorter time frame but hit resistance from a level set two years ago. Sellers who have been holding for a long time may decide to sell once they break even, creating downward pressure on the stock.
But if you don’t zoom out, you’ll never see this…
To avoid this, always check the bigger picture by looking at multi-year charts. This helps you avoid false breakouts that are doomed to fail when they hit long-term resistance levels.
The best way to steer clear of false breakouts is to learn everything you can … and the best way to educate yourself is to join us in the Daily Income Trader system. We offer live webinars twice per day, even on weekends. Our system includes algorithms, a trading platform, news feeds, charting tools, scans, educational eBooks, and more…
By following these five tips, you can significantly improve your chances of success when trading breakouts (and avoiding false ones).
Have a great day everyone. See you back here tomorrow.
Tim Bohen
Lead Trainer, StocksToTrade