Failed Breakouts and Volume Analysis

I would be remiss if I didn't touch on the topic of failed breakouts.  As a day trader that specializes in early morning breakouts, I have my fair share of trades that just don't work out.  So, how do you know when a trade is failing?  Simple answer - you can see the warning signs in the volume.

Let's dig into the charts a bit.

False Breakout 1

Above is the chart of Amazon and you can see the stock attempted to break out in the first hour of trading.  Notice how the volume on the breakout attempt was less than stellar.  You shouldn't be surprised when the stock begins to float sideways with no real purpose.  While this would have been a bad trade, because your money is idle, it's still much better than what I'm getting ready to show you next.

False Breakout 2

The above example of ESPR would drive me crazy 6 years ago.  Notice how the volume dries up as the stock attempts to make a lower low on the day.  The key is to get out if the price action begins to chop sideways for many candles.  When you sit in a stock hoping things will go your way, you are better off making a donation to charity.  At least the money will go to a worthy cause.

In Summary

1. Breakouts often fail
2. If the volume dries up on the breakout, look to get out within a few candles if things don't turn around
3. If you want to play the reversal, wait for a few candles to see if the peak holds and enter a trade counter to the morning gap
4. You can use the peak of the first candlestick as a logical point to exit the trade