Dan Zanger: Examine Breakout Quality Before the Entry

A hypothetical stock spends six weeks below 80.00, then closes at 80.60 on twice its usual volume. By the time another trader notices, it is at 84.00. The chart still shows a breakout, but the entry has become a different proposition. Dan Zanger’s chart-focused work is a useful setting for examining that difference.

Zanger’s ChartPattern biography describes his technical stock analysis and newsletter. That page also reports exceptional historical returns. Those claims aren’t needed to evaluate the particular chart decisions examined here, and this profile doesn’t use them as an expected outcome.

Every price, volume figure and trade result below is hypothetical. These are independent exercises in describing bases, breakouts and their limitations, rather than accounts of Zanger’s trades or a claim to reproduce his full method. The central question is what the chart actually supports before an entry becomes a story about future gains.

Dan Zanger and the difference between a pattern and an entry

The opening base has a visible ceiling at 80.00. Suppose its final pullback reaches 77.50 and an illustrative trade plan uses 77.40 as its exit reference. An entry at 80.60 creates 3.20 of initial distance. An entry at 84.00 creates 6.60.

With 660 of planned price risk, the later entry permits 100 shares before costs. The earlier entry permits 206 whole shares, leaving a small unused allowance. The same pattern name conceals a substantial change in position economics.

I would record the 3.20 and 6.60 distances before describing the second entry as “the same breakout.” The chart’s history is unchanged, but the available price and the remaining uncertainty have moved. The future advance might justify either entry or neither.

The support and resistance guide helps identify the reference level. It doesn’t establish how far above it an entry remains worthwhile. A maximum entry distance needs its own definition and evidence, rather than an unsupported rule attributed to a famous trader.

Measure the base instead of calling it tidy

Consider two hypothetical six-week consolidations with the same ceiling of 80.00. One extends down to 76.00; the other reaches 68.00. Measured from the ceiling, their depths are 5% and 15%. They may look similar on charts with different vertical scales.

A study can also record the final five-session range. If that range narrows from 6.00 earlier in the base to 2.00 near the end, the compression is observable. Whether it improves the subsequent result requires comparison with other cases.

Bollinger Band Width supplies one way to quantify changing dispersion. Its value depends on the chosen period and calculation. It should not be treated as interchangeable with the base’s high-to-low depth.

A narrow base describes recent prices. Institutional absorption of all available supply remains unproven, and participants may change their orders immediately when news arrives. A quiet formation can break in either direction. The measurement gives a research variable, not a guarantee.

Volume expansion needs a denominator and a timestamp

Suppose the breakout session trades 2.4 million shares against a prior 20-session average of 1.2 million. The ratio is 2.0. If the average instead includes the current session, the denominator changes and the result becomes a different measure.

A study using the completed daily total must also explain when entry occurs. At midday, the final 2.4 million figure is unavailable. Treating the eventual full-day total as evidence for a morning order introduces information from the future.

I find the timestamp as important as the 2.0 ratio. An apparently objective filter becomes misleading when the number was not available at the decision point. A next-session entry avoids that particular problem but introduces a possible opening gap.

The guide to volume confirmation on breakout candles expands on the comparison. High volume establishes activity relative to a baseline. It doesn’t identify all participants or establish that the next move will continue upward.

Relative performance differs from an oscillator reading

A fictional stock rises from 50.00 to 55.00 while its benchmark rises from 100.00 to 102.00. Their simple returns are 10% and 2%. The stock-to-index ratio rises from 0.50 to approximately 0.5392, showing relative outperformance over that interval.

That comparison is different from the Relative Strength Index, which measures a security’s own recent gains and losses under its formula. A high RSI doesn’t by itself tell the reader whether the stock outperformed the benchmark.

The William O’Neil profile offers relevant growth-stock context. A practical comparison can keep the stock’s return, the benchmark’s return and the ratio in separate fields, so the intended meaning of strength remains clear.

Relative outperformance also occurs during declines. A stock falling 5% while its benchmark falls 12% is relatively stronger but still loses value. Calling it a leader doesn’t turn that negative absolute return into a gain or establish that a breakout is imminent.

The first failure belongs in the pattern record

Imagine that price closes above 80.00 at 80.60, then finishes the next session at 79.20. A week later it clears the ceiling again and advances. A retrospective chart can make the successful second attempt dominate the story.

A complete study preserves the first attempt, including its entry assumption, costs and outcome. If the strategy permits another attempt, that permission needs a rule. Otherwise the test can keep retrying until the chart eventually supplies a winner.

For example, a research specification might allow a new attempt only after five completed sessions back inside the range. Another might require a fresh contraction in the final three bars. Those are invented rules for comparison, not Zanger’s prescribed conditions.

The rejected or unsuccessful cases carry useful information about the total cost of participation. A collection containing only the eventual winners cannot establish a win rate, average loss or expected result for the strategy that would have encountered all the attempts.

Price above an old high still faces future supply

A hypothetical stock reaching a new high at 100.00 has no earlier recorded trade above that level in the selected price history. That fact is narrower than saying there are no potential sellers above it.

Existing holders can decide to realise gains at 101.00, new short positions may appear and future corporate issuance can change the available supply. The chart’s lack of old transactions above the price doesn’t remove those possibilities.

A record of prior volume around 95.00 likewise cannot identify which participants still hold positions from that area. Some may have traded out long ago. Describing the area as a reference for study is more defensible than asserting that trapped holders will necessarily exit there.

A practical worksheet could mark 95.00, the new 100.00 high and the subsequent closes, then compare reactions across a set of cases. It would retain crossings that failed to attract a reversal as well as those that did. The level’s reputation needs the full record.

Concentration changes the account’s dependence on one outcome

Suppose a fictional account holds five positions, each with 400 of planned price risk. All five are growth stocks from one industry. The list contains five names, but a shared earnings shock could affect them together.

If each loses its planned 400, the combined result is 2,000 before costs. If gaps produce losses of 600 each, it becomes 3,000. The example distinguishes a planned protective distance from a hard ceiling on realised loss.

A review can compare the largest single position with the exposure to common industry and market factors. It can also examine how concentration changed after recent gains. A rising equity curve doesn’t reveal whether the account has become increasingly dependent on one narrow theme.

For the breakout study, the useful question is whether the collection of trades remains within its stated constraints when several fail together. Studying an exceptional historical winner doesn’t answer that portfolio question for a different account, period or set of securities.

Books for comparing chart decisions

Momentum Masters presents a roundtable with Mark Minervini, David Ryan, Dan Zanger and Mark Ritchie II. A useful reading task is to compare how the contributors discuss the same issue, such as a breakout that returns inside its base. Their answers need not become one blended rule.

How to Make Money in Stocks, by William J. O’Neil, provides related growth-stock reading. Keeping its framework distinct from Zanger’s account prevents a familiar rule from being reassigned to the wrong author. The 80.60-versus-84.00 example offers one concrete question to bring to both books.

Disclosure: As an Amazon Associate, I earn from qualifying purchases.

Momentum Masters: A Roundtable Interview with Super Traders is linked in hardcover: (US) Momentum Masters, (UK) Momentum Masters, (DE) Momentum Masters.

How to Make Money in Stocks is linked in the fourth-edition paperback: (US) How to Make Money in Stocks, (UK) How to Make Money in Stocks, (DE) How to Make Money in Stocks.

Keep the original entry in view

At 84.00, the old breakout at 80.00 is still visible. The planned distance to 77.40 is now 6.60, and the quantity has to be evaluated on that basis. A pattern’s name can remain unchanged while the trade it offers changes substantially.

Learn the pattern. Ride the trend. Keep the gains.

Educational content only. Not investment advice. Trading involves risk. You are responsible for your decisions.