Breakouts are the hardest pattern to predict correctly and the one pattern that fails the most often. There are broadly three kinds of breakouts:
- Expanding triangle
- Trading Range breakout
Essentially, all breakouts are breaking out of trading ranges and a triangle breakout represents a narrowing trading range while an expanding triangle represents a widening trading range. A flat trading range breakout can be anticipated by its failure to breakout the other side or could be entered on a breakout pullback. This approach is unsuitable for triangles.
However, for a narrowing triangle, there is a simple guideline. It normally breaks (b34) in the direction of the previous trend (AM bear move b1-12). Sometimes the triangle will break and reverse right away, but if the breakout bar has a strong close and the stop beyond it (b34 hi) is not taken out, its usually a successful breakout and should run for at least 2 legs.