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Tackle Today: Breakouts and Volume Confirmation

May 3, 2021

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Are Institutions Swarming?


Today brings us to traders’ third and final filter when determining the validity of a breakout: volume.

Volume measures the number of shares changing hands and reflects the level of participation. There is a wide variety of participants in the stock market, but ultimately, we can narrow them down into two groups: institutions and retail. Institutions include banks, hedge funds, pension funds, mutual funds, and the like. They are pooled money and have deep pockets.

By contrast, retail traders don’t pack much firepower.

Who do you want leading your breakout attempt?

The big boys!

We like to see high volume accompany a breakout because it signals institutions are entering the fray. Due to their deep pockets, they don’t buy stocks – they accumulate. This continued buying is the exact dynamic that helps create follow-through for breakouts.

Light volume breakouts carry higher failure rates because they lack institutional backing.

If you’re going to wait to see if volume increases, however, you can’t exactly buy at the moment of the breakout. Instead, you’d have to wait until the end of the day or the next day to allow time for the volume to rack up.

Doing so provides more confirmation but requires you to pay a higher price. Such is the tradeoff.


Chart of the Day

AMD Breakout With Volume Confirmation

There are many ways to determine whether you should pull the trigger on a breakout One of the confirmation signals some traders use is higher than average volume. Those big green candles on the volume chart can be a good sign that there are plenty of institutions on board with the breakout.
Earnings season continues in full force this week with a plethora of huge names. There will be no shortage of interesting story lines this week!

Video of the day

Understanding Market Volume

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