It's no surprise then that an estimated 90% of retail traders eventually go bust.
But it's crucial to think like a technician if you're going to find success as a breakout trader. Instead of using technicals as a way of predicting where share prices are headed in the future, you're using technicals to define supply and demand characteristics that lead to a higher probability of a move in one direction than a move in the other.
In other words, you don't want to predict -- you just want to react when a breakout happens.
Breakout traders are basically looking for “high-probability setups” where share prices have moved outside of the price barriers created by support or resistance levels. To fundamental investors, it's enticing to buy shares before a breakout actually happens, but the breakout is the critical element of creating that high-probability setup. As long as there's still a glut of supply overhead, you don't want to be a buyer.
A prominent portfolio manager I know once described breakout trading as a "traffic light system." When you're sitting in your car at a stoplight, you don't try to predict when the light is going to go green. Instead, you just hit the gas when it does.
The chart below is a great visualization of how that "traffic light system" gets put into practice. This chart was showing traders a red light until shares broke out above $9.50 resistance. That's when the light turned green. The key to buying wasn't predicting the breakout -- it was buying when after the signal hit.