Breakouts and Closing Price

Introduction

Gann repeatedly stressed that the closing price is more important than the intraday high or low. A stock may cross an old top during the day but fall back by the close. In this lesson, you will learn Gann's rules for trading breakouts and breakdowns correctly.

Gann's Breakout Rules

• It is safer to wait until prices move a little above old highs, and even safer to wait until they close above those highs, before buying.
• It is safer to wait until prices move a little below old lows, and even safer to wait until they close below those lows, before selling.
• The longer the time a stock has stayed below an old high, the more important the breakout when it finally comes.

The Pullback Rule

Gann said: when prices advance to new high levels, they generally react back to the old tops, which is a safe place to buy. When prices decline below old lows, they generally rally back to the old lows, which is a safe place to sell.

Example: Breakout and Pullback (Illustrative)

Bharti Airtel has made highs around Rs 1,600 for five months.

• Day 1: price touches Rs 1,612 during the day but closes at Rs 1,595. No valid breakout yet.
• Day 3: price closes at Rs 1,628. Valid breakout on a closing basis.
• Day 6: price reacts to Rs 1,605, near the old top, and holds.
• Gann entry: buy near Rs 1,605 to Rs 1,610, stop-loss below Rs 1,580.
• The old resistance at Rs 1,600 has now become support.

Weekly and Monthly Closes

A breakout on a weekly close is more important than one on a daily close. A breakout on a monthly close is more important still. Gann said the longer the time period, the greater the importance of the change in trend.

Example: Monthly Breakout in Nifty (Illustrative)

If Nifty has failed at 25,000 for eight months and then closes a month at 25,300, a Gann trader would consider this a major change, likely to lead to a bigger move than a one-day breakout.

Prolonged Advances End Fast

Gann observed that after a prolonged advance ending in a fast, runaway market, prices often come down much faster than they went up. That is why he kept daily charts at the end of fast moves, to catch the first sign of a trend change.

Sharp Declines Correct Overbought Markets

After a rapid rise, the first sharp decline, lasting from a few weeks up to about seven weeks, often corrects an overbought market and prepares it for a secondary advance.

Common Mistakes

• Buying on an intraday breakout without waiting for the close.
• Chasing a stock far above the breakout level instead of waiting for a pullback.
• Ignoring volume. A genuine breakout usually comes with higher volume.

Trade Breakouts on GoPocket

Check closing prices after 3:30 PM on the GoPocket app. If a stock has closed above an old top, plan your trade and place a Limit buy order as an AMO near the breakout level so that you can catch a pullback the next day. Add a stop-loss order after execution.

Frequently Asked Questions

How much above the old high should the close be?

Gann used 1 to 2 points on US stocks. For Indian stocks, a close about 0.5% to 1% above the level is a practical filter.

What if there is no pullback?

You can buy a smaller quantity on the breakout close and add more on any pullback.

Key Takeaways

• Trust closing prices over intraday moves.
• Old tops become support after a breakout.
• Weekly and monthly breakouts are more powerful.

Disclaimer: Illustrative example only.