Ask Colin

What methods - besides volume - can be used to determine whether a breakout has legs or not?

I really wish I knew a way to know this myself.

Volume confirmation is the classic method. However, I find that it seems to work better in American textbooks (and maybe in their market) than it does here. I buy lots of breakouts with no volume confirmation that work out just fine. Maybe the textbooks are just well chosen examples in hindsight, perpetuating an old theory. Maybe too, our market is less liquid than the main US markets.

That said, it does make sense that volume is important in the sense that it signals commitment from buyers (or sellers in a downward breakout).

As well as naked volume, some of the other methods like On Balance Volume (OBV) and Volume Price Trend (VPT) are probably better. However, your question is "other than volume".

The short answer is that I don't really know. My approach to it is to make small investments in breakouts and build the position if the breakout "has legs", ie starts to trend and cut losses on the ones that fail. This works pretty well when combined with my other risk management strategies. After all, there is no way to be right much more than half the time across both bull and bear markets. The rest is money management.

One idea that I think is worth researching is relative strength. If the stock that breaks out is weaker than the market, then logically it should be expected to fail. In other words the market is roaring up and our stock weakly breaks out late in the peace. Contrast this with a stock that breaks out when the market is flat or declining. Now that might be a strong stock.

If you decide to pursue this idea and research it, do let me know what you find.