A BREAKOUT is a technical analysis term used to describe the movement of a stock out of a set trading range which continues away from that trading range at an accelerating pace --once either support or resistance is broken. Breakouts can occur over any timeframe, and catching one and riding it is one of the most fun and profitable trading styles out there.

In fact, our Day Trading Systems use this method for profitable trades on an almost daily basis. For example, if a stock has traded in the $6-$8 range for a month or so, moving back and forth between those two levels, a move through $8 to $8.25 could signify a breakout. The same can be said for intraday movement, where a stock finally falls under $50.45 after bouncing off of that support level all day long.

The first step to spotting a breakout is to determine the amount of time that you will want to hold the position. Whatever amount of time that is, use a chart of at least 5 times that length (10 is preferable) to determine your support and resistance points. In other words, if you are looking for a 1 hour trade, look at the last 5-10 hours to see if you can find a trading range and solid support and resistance levels. If you are looking for a 5 day hold, keep an eye on 25-50 day charts of the stock to see your key support and resistance levels.

The best way to explain is always through examples, so look at a hypothetical scenario for DELL:

Say over the last 2 days DELL has seen considerable SUPPORT (price where stock has bounced off of consistently) at 31.55-31.60. RESISTANCE (price where stock has bounced DOWN consistently) is at around 32.10.

Knowing those numbers, we can watch DELL for signs of a BREAKOUT. Any move by DELL under the support level (lower than 31.50) or above the resistance level (higher than 32.15) could indicate that the stock is starting to break out on the next trading day. IMPORTANT: With breakout plays, you play IN THE SAME DIRECTION as the stock moved -- if it went DOWN through support, you should short sell the stock. If it went UP through resistance, you should buy the stock. The theory of breakouts is that once the stock has moved down through a significant support level, it is an indication that buying of the stock is slowing down, and that the stock may accelerate downward very quickly from that point. The opposite is true on stocks that move up through resistance (selling is fading).

FAKEOUTS: Of course, no trading style is 100% accurate. Many times, stocks will move through a support or resistance level and then quickly retreat back into the trading range. ONCE YOU TAKE YOUR BREAKOUT POSITION, set a STOP LOSS just on the other side of the support/resistance level that was just broken. If the stock moves back through that level, the breakout did not occur and there is no sense in holding the position any longer.

BREAKOUTS ARE RARE: Keep in mind that you may watch a stock for days without ever seeing a breakout. True breakouts occur as a stock moves through a well established support/resistance level on INCREASING VOLUME. To find breakouts effectively, it is essential to scan through plenty of stocks and wait for your moment to arrive. DayteradeTeam scans thousands of stocks on an hourly basis, looking for that one opportunity that can bring profits to all of our subscribers!

Andy Swan is co-founder and head of trading at DaytradeTeam.com