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.
the Analyst's answerJean 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 answerRobert 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