BreakoutWhat Is The Breakout Technique?


  • Breakout is a potentially very profitable market strategy whereby there is an increase in volatility and relatively strong movement as a result of a breakdown/breakup of a horizontal level of support/resistance or of a dynamic trendline channel.

    Usually the breakouts occur after periods where price is within a lateral consolidation phase between a support and resistance. When price is formed as a result of an increase in trade,establishes support or resistance levels. The increase in volume causes the market to move rapidly towards either the support or resistance levels consequently leading to a price close beyond either of the two levels. This initial price close creates a remarkable move in the direction of the break, making this first break-up point a potentially profitable entry level for trade/ investment.

     

    There are two types of breaking: continuation and reversal. The first is a model where, after a consolidation phase, breaks above the resistance level and continues in the initial direction of the trend (as in the image above). The reversal is when, after the consolidation phase, it breaks the level of support / strength to reverse its original trend (as the picture below).

    In some cases, it is possible that the price temporarily breaks the level, but back again, in this case it is a fake breakout. It is therefore important not to come in immediately but wait for the price to exceed the level clearly by a close beyond either of the levels.

     

    In addition to the most common breakout of resistant support levels, dynamic trendline or channel truncation can be exploited to provide a more or less temporary reversal of an existing trend (see following image). Even in this case it’s necessary to be careful of the fake breakout.

    Breakout setups occur regularly in the Forex market and are often exploited by traders, especially by those who have little experience with chart reading. This is because they can be easily identified at a glance and are considered fairly safe investments when used correctly.

Interviews

  • the Analyst's answer

    Jean Grossett - Financial analyst

    For a trader to be successful using this breakout strategy, s/he has to exercise patience. This patience comes with an appreciation and understanding of financial time series, i.e. how the different time frames relate.

    First the trader has to figure out the timeframe which the current trend is established. Once this is done, s/he will only have to wait for the levels established around this trend to be violated. The trader must be decisive of the time frame of choice, and should not go about switching time frames at random.

    Please note that for a level to be considered a breakup or breakdown, the closing price of that chosen time frame has to go beyond either the support or resistance level.

  • the Manager's answer

    Robert Danvil - Investment Manager

    The breakout strategy, in the hands of a patient trader can be a very useful tool. For simplicity sake, it is easier to see both horizontal and trend line channels as simply channels. What makes them difference is in the objects used on the trading terminal. One is a horizontal line object while the other is a trend line object. In fact other line visualization objects come shipped as channels, especially on the MetaTrader 4/5 platform. Examples of other objects are Fibonacci fans and retracement

Members Comments

  1. Profile photo gravatar of Urban Leffler
    Urban Leffler (earl71)
    says:

    Most of my trading strategies are based on breakout/breakdown, but I only use them on hourly or daily chart as they are more successful there. Also, I keep my stops closs when using breakout strategy.

  2. Profile photo gravatar of Dusty Leannon
    Dusty Leannon (santa61)
    says:

    A breakout is a price movement of a security through an previous level of resistance, Breakout is usually followed by heavy volume and an increased amount of volatility. Traders buy the underlying asset when the price breaks above a level of resistance or when it breaks below a level of support. Once a resistance level is broken, it often becomes the next level of support when the asset experiences a pullback. Most traders use chart patterns and other technical tools, such as trend lines, to identify possible resistance price points that are likely to experience breakouts. Similar price movements to the downside are more often referred to as breakdowns.

  3. Profile photo gravatar of Vivian Jacobi
    Vivian Jacobi (kozey-verda)
    says:

    A breakouts can be used for reverse trend, rising trend and declining trend line. If the trend is rising the price reached daily resistance and then pulled back. If it is continued rising trend line and the price breaks the daily resistance it will continue to rise until reach new high level.

  4. Profile photo gravatar of Crystal Dietrich
    Crystal Dietrich (ernser-evert)
    says:

    Breakout is one of the most used technique by the traders. It can represent continuation or change of the trend.In the first example after a big impulse movement in the market, the price will enter into a correction phase or a range trading market. As long as the price stays in a range trading, the stronger the breakout will be and usually, but not always, it will continue in the same direction within the initial trend.
    Sometimes, after a strong impulsive movement after the correction phase the price will break in a opposite direction of the previous trend, and that is a called a reversal, meaning that the trend is broken and now we face an opposite trend.
    It is always preferable to use another tools in order to confirm the breakout and whether it is a continuation or a reversal.

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