Day Trading 3-Bar Volume Breakouts

Ken Calhoun |

In our last article, we looked at the author’s new “3-Bar Volume Breakout” strategy for swing trades. The strategy is designed to help traders identify increasing-volume breakouts in strong uptrends. This article will focus on using this strategy for day trading stock breakouts using 5-minute candlestick charts.

3-Bar Volume Breakouts For Day Trading

On a 5-minute 2-day candlestick chart, traders should look at the bottom of the chart to look for a pattern in which 3 sequential increasing-volume 5-minute bars occur.  The basic trading strategy is to go long in an uptrending chart with this 3-bar volume breakout with an entry placed ten cents (.10) above the high of the 3rd candle on a volume bar following this signal.

For example in Figure 1, Qihoo 360 Technology Co. Lts. ($QHOO), there’s a clear example of this 3-Bar Volume Breakout illustrated inside the green box at the bottom of the chart. Note that the height of the volume bars is getting taller in each one, and the chart is in an uptrend. Developing both an initial entry (.10 above the high of the 3-Bar Volume Breakout, in this case over 59.5) becomes relatively easy.

Fig1_QIHU.gif

The reason this specific volume confirmation pattern is effective is because it reveals increasing buying pressure along with higher price-action momentum. 

Why Use 3 Increasing Volume Bars?

One may wonder why not 2, or 4 or some other number is optimal for this pattern. In the author’s experience, using just 2 increasing volume bars often leads to false breakouts and choppy entries that are prone to pullbacks or reversals. Two increasing volume bars can be used to get the traders’ attention, to put a candidate on a watchlist; however it’s best to wait until the 3rd higher-volume bar has been observed prior to entering the position.

How about 4 volume bars? Alternatively, while 4 increasing volume bars would at first glance seem to provide an even stronger volume confirmation, the practical truth of the situation is that these are very rare and unlikely to be found readily.

So the use of 3 increasing volume bars is the best choice, for confirming breakout continuation entries, on both swing and intraday charts. At first it takes practice to learn how to scan for and spot these, however it gets easier with time, as does any pattern-day or swing trading approach.

The Importance of Context: Trading In Strong Trends

As with most breakout trading patterns, the immediate prior day’s trend is important to keep in mind. In Figure 2, Tesoro Corp. (TSO) , the prior day’s trend was a steady uptrend, which of course is best for a breakout continuation entry. The 3 volume-bar increasing pattern is seen at the bottom of the chart, and price continued to climb from 78 up to 80 after the signal was seen.

Fig2_TSO.gif

The success of this pattern is illustrated best by looking for the 3-volume pattern in similar uptrending charts. The volume bars increasing when price continues to climb indicates a reaffirmation of buyers to continue buying, which provides an effective breakout entry strategy.

The 3-Bar Volume Breakout pattern can become a valuable tool to help both intraday and swing traders. It shows the underlying buying volume pattern in an uptrend, which is useful when deciding which charts are strongest for new breakout trading entries.

Recommended resource: For more on using this and other trading strategies, see the author’s complimentary Saturday “Trading Week Ahead’ webinar events at DaytradingUniversity.com/free

Ken Calhoun is a trading professional who has traded millions of dollars of equities since the 1990s, and is the producer of multiple award-winning trading courses and video-based training systems for active traders.  He is a UCLA alumnus and is the and DaytradingUniversity.com and StockTradingSuccess.com (with Steve Nison), popular online educational sites that reach tens of thousands of active traders worldwide. 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
TSO Tesoro Corporation 84.91 2.70 3.28 2,510,815

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