Volume Breakout Strategy: How to Trade Breakouts with Volume Confirmation

Breakout trading is one of the most popular strategies, but many breakouts fail. The key to successful breakout trading is volume confirmation. In this guide, we will explore how to use volume to identify high-probability breakouts and avoid false breakouts that trap traders.

Why Volume Matters for Breakouts

A breakout occurs when price moves beyond a defined level of support or resistance. But not all breakouts are created equal. Volume tells you whether the breakout has conviction behind it.

Characteristics of Valid Volume Breakouts

1. Volume Expansion

On the breakout bar, volume should be significantly higher than the average. A general rule is that breakout volume should be at least 50% above the 20-day average volume. The more volume expansion, the better.

2. Volume During Consolidation

Before the breakout, volume should ideally contract during the consolidation phase. This shows that selling pressure (in an upside breakout) or buying pressure (in a downside breakout) is drying up.

3. Follow-Through Volume

After the initial breakout, the next few bars should also show elevated volume. This confirms that the move has staying power and is not just a one-day event.

Volume Breakout Trading Strategies

Strategy 1: Classic Volume Breakout

Trade breakouts with strong volume confirmation.

• Identify a consolidation pattern (range, triangle, flag, etc.)
• Wait for price to break the pattern boundary
• Confirm that breakout volume is at least 50% above average
• Enter on the breakout or on a pullback to the breakout level
• Place stop below the breakout level (for upside breakouts)
• Target a measured move based on the pattern

Strategy 2: Volume Precedes Price

Watch for volume expansion before the actual breakout.

• Sometimes volume picks up before price breaks out
• This can be a sign that smart money is accumulating
• If you see volume expanding while price is still in the range, prepare for a breakout
• Enter when price confirms by breaking the pattern

Strategy 3: Pullback to Breakout Level

Wait for a pullback to the breakout level for better entries.

• After a valid volume breakout, price often pulls back to test the breakout level
• This pullback should occur on decreasing volume (no supply on the pullback)
• Enter when price bounces off the breakout level on low volume
• This strategy offers better risk/reward than chasing the initial breakout

Identifying False Breakouts

False breakouts occur when price breaks a level but quickly reverses. Volume can help you avoid these traps.

Signs of a False Breakout

• Low volume breakout: If price breaks out on below-average or only slightly above-average volume, be suspicious
• Quick reversal: If price breaks out but closes back inside the range on the same day
• Volume on the reversal: If the reversal day has higher volume than the breakout day, it is likely a false breakout
• No follow-through: If volume dries up immediately after the breakout

Trading False Breakouts

Some traders actually trade false breakouts as a strategy:

• Wait for a low-volume breakout
• When price fails and reverses back into the range, enter in the opposite direction
• Target the opposite side of the range
• This strategy profits from trapped breakout traders

Volume Breakouts in Different Patterns

Range Breakouts

For horizontal range breakouts, look for volume to contract during the range and expand significantly on the breakout. The longer the consolidation, the more significant the breakout.

Triangle Breakouts

Triangles typically show contracting volume as the pattern forms. The breakout should occur on a volume surge. Ascending triangles tend to break up, descending triangles down, and symmetrical triangles can go either way.

Flag and Pennant Breakouts

These patterns typically form after a strong move (the pole). Volume should be high on the pole, low during the flag/pennant, and high again on the breakout.

Cup and Handle Breakouts

The handle should form on contracting volume. The breakout from the handle should be on expanding volume. This is one of the most reliable volume breakout patterns.

Volume Breakout Checklist

Before trading a breakout, go through this checklist:

• Is there a clear pattern or level being broken?
• Did volume contract during the consolidation?
• Is breakout volume at least 50% above average?
• Is the stock liquid enough to trade easily?
• Is the overall market supportive of the breakout direction?
• Is there a clear stop loss level?
• Is the risk/reward ratio acceptable (at least 2:1)?

Common Volume Breakout Mistakes

• Chasing breakouts: Entering too late after the move is extended
• Ignoring the market: Trading breakouts against the overall market direction
• Not waiting for confirmation: Entering before volume confirms the breakout
• Wide stops: Risking too much by placing stops too far from entry
• Over-trading: Taking every breakout instead of waiting for the best setups

Summary

Volume confirmation is essential for successful breakout trading. Valid breakouts occur on above-average volume with follow-through in subsequent bars. Low-volume breakouts are more likely to fail and reverse. Use the volume breakout checklist before every trade, and always wait for confirmation rather than anticipating breakouts. By combining pattern recognition with volume analysis, you can significantly improve your breakout trading success rate.

Explore more volume strategies in our guides on Relative Volume and Volume Spread Analysis.