I follow a lot of blogs and I have discovered that breakout traders tend to make a common mistake. If they would avoid this one mistake, they might be able to consistently make money trading breakouts.

Take a look at the following scenario:

stock chart breakout

Quest Software (QSFT) has just broken out through the pivot point in a cup with handle pattern. But, if I were a breakout trader, I certainly would not have bought the breakout.

Why?

Because it has multiple up days prior to the breakout. Plus, there is an expansion of range on the last candle which is what you would typically see right before a reversal!

Is it possible that this stock will continue the breakout? Of course. But, possibilities are useless in stock trading. We deal in probabilities.

Here is a better breakout scenario:

stock chart breakout

This stock was trading sideways and then it suddenly broke out with one candle exploding through resistance. And, it closed near the top of the range. There no multiple up days prior to the breakout.

This is a much better scenario!

I don’t trade breakouts. But, if I did, I would look for exploding candles that do not have multiple up days prior the breakout.

Forward this blog post to anyone that you know who trades breakouts. Then watch their eyes light up when they realize what they have been doing wrong!