Swing Trading 3-Bar Volume Breakouts

Ken Calhoun |

When it comes to carefully finding the strongest breakout signals, it’s important to use increasing volume in an uptrend as a confirming technical entry pattern. The author’s new “3-Bar Volume Breakout” strategy helps traders identify increasing-volume breakouts in strong uptrends.

3-Bar Volume Breakouts Defined

On a 90-day daily candlestick chart, traders should visually scan the bottom of the chart to look for a pattern in which three sequential increasing-volume bar days occur. The basic trading strategy is to go long in an uptrending chart with this 3-bar volume breakout with an entry placed fifty cents (0.50) above the high of the third candle on a day following this signal.

When checking for this pattern, the color of the volume bars is irrelevant. What matters most is that the stock (or ETF) already be in an uptrend, when the 3-bar pattern is seen. The reason this can be an effective strategy is because it visually reflects a series of three days in a row in which both volume and price are increasing. 
For example in Figure 1 for Rackspace Hosting Corp. (RAX) , there’s two examples of the 3-Bar Volume Breakout illustrated inside the green boxes 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 (0.50 above the high of the 3-Bar Volume Breakout) as well as a position sizing entry (usually best at around two dollars ($2), above the first entry), becomes relatively easy.


Swing Trading with 3-Bar Volume Breakouts & Cups

In previous articles we’ve looked at cup breakouts, wide-range candles and other professional swing trading breakout entry patterns. Using the 3-Bar Volume Breakout entry strategy to confirm these entries provides an especially good approach, since increasing multi-day volume serves to add additional strength to the breakout signals as they’re seen.

This is illustrated in Figure 2 for Target Corp. (TGT) , in which an earlier cup pattern is observed (Sept. 17 through Nov. 9), at which point the 3-Bar Volume Breakout is seen Nov. 11, 12 and 13. Following this, price went from the cup high near $65/share up to the $73-$75/share range in less than two weeks, providing an outstanding trading entry setup.

It’s a smart idea to look for volume confirmation for any trading signal; this has been well-known in the trading industry for decades. This specific high momentum 3-Bar Volume Breakout tactic shows traders “how to” use volume confirmation in a particularly effective manner for stock & ETF swing trading.









3-Bar Volume Breakouts: Closing Tips for Active Traders

Discovering how to navigate and trade swing trading breakouts is made easier with the help of good professional price-action momentum signals, candlestick patterns, Western classic cup breakouts, gaps and increasing-volume patterns. Here’s a few additional tips on using this pattern successfully:

  • a) It’s best if the slope of the line made by connecting the tops of the 3-Bar Volume Breakout bars is in a standard 45-degree angle breakout, as I’ve taught for years. Flatter slopes (or sharp ones) are riskier.
  • b) When there’s an opposite pattern, such as decreasing volume in three sequential days, new entries should be avoided, and if already in a trade, trailing stops should be tightened up.
  • c) This pattern is best when the candle height of Volume Bar #3, the third one, is the tallest. This indicates strong buying pressure, as the range increases.
  • d) Although this pattern can be used with consolidation breakouts, it’s most effective when used in already-uptrending charts, because it shows strong renewed buying interest by traders, as volume increases in a three day cycle during the breakout continuation.

The 3-Bar Volume Breakout pattern can also be adapted for use in intraday charts, using 5-minute candlestick charts; this may be covered in an upcoming article as well.


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 founder of Daytrading University and Stock Trading Success (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


Symbol Name Price Change % Volume
RAX Rackspace Hosting Inc 31.86 0.03 0.09 1,551,309
TGT Target Corporation 68.23 0.52 0.77 3,121,799


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