Breakout trading is one of the most exciting strategies because it catches stocks at the beginning of major moves. A breakout occurs when price moves above a resistance level with conviction, often leading to rapid price appreciation. But finding these opportunities before they happen requires systematic screening. Here is how to identify breakout candidates.
What is a Breakout?
A breakout happens when a stock price moves above a resistance level that has contained it previously. The best breakouts occur after a period of consolidation, where supply and demand reach equilibrium before buyers overwhelm sellers. True breakouts are characterized by increasing volume and follow-through in subsequent sessions.
Key principle: The longer a stock consolidates, the more powerful the eventual breakout. A stock that has tested resistance five times over six weeks will often move more explosively than one that just touched it once.
Essential Breakout Screening Criteria
Price Near Resistance
First, find stocks approaching key resistance levels:
- Within 3% of 52-week high: Testing major resistance
- Within 5% of recent swing high: Approaching local resistance
- Price at upper Bollinger Band: Testing volatility resistance
- Near round numbers: Psychological resistance levels
Consolidation Patterns
The best breakouts come from tight consolidation:
- Volatility contraction: 20-day ATR lower than 60-day ATR
- Tight price range: 20-day high/low range less than 15%
- Flat base formation: Price trading sideways for 3+ weeks
- Bollinger Band squeeze: Bands at narrowest point in 6 months
Breakout Screen Example
Price within 5% of 52-week high
20-day ATR / 60-day ATR < 0.9 (volatility contraction)
Average volume > 500,000
RSI between 50-65
Price above 50-day SMA
This identifies stocks in tight consolidation near highs, ready to break out.
Volume Characteristics
Volume tells you if a breakout is real or fake:
Pre-Breakout Volume
- Declining volume during consolidation: Shows supply drying up
- Light volume pullbacks: Sellers lack conviction
- Volume dry-up: Current volume below 50-day average
Breakout Day Volume
- Volume surge required: 150%+ of average volume
- Highest volume in weeks: Confirms institutional interest
- Gap up on volume: Strong demand outpacing supply
Technical Setup Requirements
Moving Average Alignment
Proper moving average structure supports breakouts:
- Price above 50-day SMA: Medium-term uptrend
- 50-day above 200-day: Long-term uptrend intact
- Price recently tested and held 20-day: Buyers defending support
RSI and MACD Positioning
- RSI between 50-65: Bullish but not overbought
- MACD above signal line: Positive momentum
- MACD histogram rising: Acceleration beginning
Classic Breakout Patterns to Screen For
Cup and Handle
A U-shaped base followed by a small pullback:
- Cup depth: 15-35% correction
- Cup length: 7-65 weeks
- Handle drift: 5-15% pullback
- Buy point: Handle high + $0.10
Flat Base
Tight sideways consolidation after prior advance:
- Price range: Less than 15% top to bottom
- Duration: 5+ weeks
- Volume: Declining through the base
- Buy point: Base high + $0.10
High Tight Flag
Sharp advance followed by tight consolidation:
- Prior advance: 100%+ gain in 4-8 weeks
- Flag correction: 10-25%
- Flag duration: 2-5 weeks
- This is a rare but powerful pattern
Screening for Pending Breakouts
Use these filters to find stocks about to break out:
- Market cap > $500 million (institutional interest)
- Average volume > 300,000 shares
- Price within 3% of 52-week high
- 20-day volatility < 50-day volatility (contraction)
- Price above rising 50-day SMA
- Recent volume declining (supply drying up)
Avoiding False Breakouts
Many breakouts fail. Filter them out by requiring:
- Sector confirmation: Industry group also showing strength
- Market conditions: Broad market in uptrend
- Volume confirmation: Never buy breakouts on low volume
- Follow-through: Wait for close above resistance, not just intraday poke
False breakout protection: Require the stock to close in the top 25% of its daily range on breakout day. This shows buyers remained in control all day, not just briefly.
Entry and Stop Loss Rules
Entry Strategies
- Buy the breakout: Enter as price clears resistance on volume
- Buy the pullback: Wait for retest of breakout level as new support
- Partial entry: Buy half on breakout, half on pullback
Stop Loss Placement
- Below the breakout level (resistance becomes support)
- Below the low of the breakout day
- 7-8% below entry price (maximum loss rule)
Post-Breakout Monitoring
After a breakout, watch for:
- Follow-through: Price continues higher in following days
- Volume confirmation: Above-average volume continues
- Failed breakout: Price falls back below resistance within days
Track Your Breakout Trades
Pro Trader Dashboard helps you analyze which breakout setups work best for you. Track entries, exits, and pattern success rates.
Summary
Breakout screening focuses on finding stocks in tight consolidation near resistance with declining volatility and volume. The best breakouts occur in stocks with solid fundamentals, proper moving average structure, and strong industry groups. Always require volume confirmation on the breakout and have clear stop loss levels defined. Remember, many breakouts fail, so risk management is essential for long-term success.
Learn more: support and resistance levels and volume analysis.