A stock market breakout in a specific share is a tradable event that some active investors can base an entire strategy around. A breakout refers to when the price of an asset moves above a resistance area, or moves below a support area. Breakouts indicate the potential for the price to start trending in the breakout direction. For example, a breakout to the upside from a chart pattern could indicate the price will start trending higher. Breakouts that occur on high volume (relative to normal volume) show greater conviction which means the price is more likely to trend in that direction.
Since not all traders use the same support and resistance levels stock breakouts can be subjective. Learning how to identify and trade potential breakout stocks gives traders one more tool. This tool can be used to create profits within an often-volatile market. Breakout stocks are shown on price charts, in particular, using candlestick charts to read price action. There are certain patterns that traders should recognize for their investment research if they wish to catch these potential stock breakouts early in the process.
Stock Breakout: Why breakouts happen
A breakout occurs because the price has been controlled below a resistance level or above a support level. This typically happens for some time. The resistance or support level becomes a position that many traders use to set entry points or stop loss levels. When the price breaks through the support or resistance level traders waiting for the breakout jump in and execute a trade. Those who didn’t want the price to breakout exit their positions to avoid larger losses.
A lot of trade activity will often cause the volume to rise. This type of movement shows that a lot of traders were interested in the breakout level. The higher the average volume helps traders confirm the breakout. If there is a little volume on the breakout, the level may not have been significant to a lot of day traders. Or not enough traders felt convicted enough to place a trade near that level at that precise moment.
Seasoned day traders know volume breakouts are more likely to fail; so, they will wait. In the case of an upside breakout, if it fails the price will fall back below the resistance level. In the case of a downside breakout which would be referred to as a break down the price will go back above the support level, it broke from below. Breakouts are commonly connected with ranges or other chart patterns. Which include triangles, flags, wedges, and head-and-shoulders.
These types of patterns are molded when the price moves in a precise way which results in well-defined support and resistance levels. Day traders know to look for these levels and may enter into long or exit on short positions if the price breaks above resistance. If the price breaks above resistance, traders may start a short position or exit long positions if the price breaks below support. Even after a high-volume breakout, the price will repeatedly (but not always) repeat to the breakout point before moving on the breakout path again.
This occurs because short-term traders will often buy the initial breakout. In which they then attempt to sell fairly quickly for a profit. This selling temporarily drives the price back to the breakout point. If the breakout is real (not a failure), then the price should move back in the breakout direction. If it doesn’t then it’s a failed breakout. Traders who use breakouts to start trades naturally apply stop loss orders in case the breakout fails. In the case of going long on an upside breakout, a stop loss is normally placed just below the resistance level. In the case of going short on a downside breakout, a stop loss is usually positioned just above the support level that has been broken.
Stock Breakout: Watch out for flukes
A breakout could result in the price moving to a new 52-week high or low if a breakout occurs near the prior high/low. But not all 52-week highs/lows are the result of a recent breakout. A 52-week high or low is merely the highest or lowest price seen over the last year. A breakout is a move above or below resistance. There are two main problems with utilizing breakouts. The main problem is failed breakouts. The price will often move just beyond resistance or support. This normally attracts traders like honey does to bears. The price then reverses and doesn’t continue moving in the breakout direction. This can happen multiple times before a real breakout occurs.
Support and resistance levels are also subjective since not every trader cares about the same support and resistance levels. This is why you must monitor volume levels. An increase in volume on the breakout shows that the level is important. The lack of volume shows the level is not important. Or it can indicate that the big traders who are the ones generating volume aren’t ready to participate yet. You can also use Bollinger Bands, which are a technical indicator for trading strategies, to help identify breakout stocks.
On a candlestick chart, Bollinger Bands move with the price, forming an envelope around it. The bands are placed a detailed number of standard deviations away from the 20-period moving average; this can be adjusted. The price will often stay inside the bands but you need to watch for the bands to visually narrow and move sideways. When the price is making big movements, the bands will be wide apart. When the price is moving little by little, the bands will contract. Quiet periods are often trailed by larger price movements and another breakout.
Summary: What Is a Stock Breakout?
Practicing when to exit to pinpoint profits is also important. It is best practice to combine more than one breakout strategy. Trades will not move well forever, and reversals occur often. A thorough strategy will allow you to take profits while they are still there. I can teach you how to day trade like the top 10% without a complicated strategy or any technical indicators, even if you are a beginner. My goal has always been to teach as many day traders to achieve their personal financial goals, whether they are novice traders or experienced traders.
The MK VIP training has plenty of resources to help you get started on reaching your day trading goals. I teach the working class how to earn $10,000 a month through day trading. I help my students avoid the challenges I faced when I first became a day trader. As of now, MK Financial LLC is already the #1-day trading coaching business in the US in just one year. You are just a click away from learning what you need to become a day trader with any amount of capital and take your life and salary to the next level.
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