A breakout is a price movement of an asset above or below a resistance region in technical analysis. A breakout could indicate that the asset’s price will trend in the opposite direction.
High-volume breakouts may be more powerful than those with lower volume. A higher volume means that the price is more likely to trend in the breakout direction.
Breakouts may occur due to channel or range breakouts or price patterns breakouts such as triangles and wedges or head-and-shoulders patterns. Breakouts are usually preceded by periods of lower volatility.
The more time a pattern has been developing, the more explosive the breakout will usually be. If the levels can be clearly defined, traders might use the same price levels for their stop loss orders. These stop orders can trigger a cascading effect that causes rapid price movements.
It is easy to see why breakout trading works. Breaking out of a range that keeps price within a certain range can indicate a bigger move.
Breakout trading can be used for almost any type of trading and timeframe.
Depending on the direction of the movement, a breakout could be considered a buy signal or a sell signal. Once price moves beyond the designated support or resistance area, a breakout trader can enter a long- or short-term position.
Breakouts, like other techniques in technical analysis can be subjective. Different traders might interpret the support and resistance levels as well as the chart patterns that provided the basis for breakouts in different ways.
It is possible for price to break out of a range, but then quickly reverses itself, which could be a false breakout. This happens when the price moves out of a range but then quickly returns to that range.
Some traders will wait to confirm the breakout in order to trade. This is done as a precaution against fakeouts. This could also mean waiting for the breakout to be retested (depending on which direction) as new support or resistance as an entry point.
Gargi Sinha is working as Senior Journalist at Confea. She has completed her Masters in Journalism from Delhi University. She has interest in crypto and blockchain technology.