What it is
Breakout trading enters as price clears a defined boundary: the high of a range, the edge of a consolidation, the previous day's high, or a Donchian channel of the last N bars. The premise is that volatility clusters, and that the resolution of a period of compression tends to be followed by expansion in the same direction.
How it works
The rules need to be explicit. What defines the level, what counts as a break (a touch, a close beyond, a break held for a set time, a volume condition), where the stop goes, and what happens on a failed break. The Donchian channel rules made public by the Turtle programme are the canonical systematic example: buy a twenty-day high, exit on a ten-day low, and size positions by ATR.
How traders use it
The statistical basis is volatility clustering, one of the least controversial facts in market data. Compression is measurable in advance through narrow ranges, low bandwidth and contracting ATR, even though the direction of the eventual resolution is not, which is why breakout systems take whichever direction arrives rather than trying to predict it.
Where it breaks down
The win rate is low, often well under half, and profitability depends on a small number of large winners, so the approach requires both a large sample and the discipline to keep taking signals after a run of failures. False breakouts are the norm around obvious levels where stops cluster, and slippage is worst precisely on the fast moves that make the strategy money. Widening the stop to avoid whipsaws usually destroys the risk-reward that made it work in the first place.
Educational reference. This entry describes how a concept is defined and used. It is not investment advice, not a recommendation, and not a signal. Any rule you build from it should be tested with realistic costs before it is traded, and no historical result guarantees a future one.