What is Breakout in Trading? Definition, Types, Examples, Strategies

What is Breakout in Trading

What is Breakout – One of the most popular technical indicators in trading is the use of levels resistance and level support to identify when the market has a breakout. Level resistance is a line connecting a series of highs for an asset in a given period. While the support level is a line that connects the lowest price of an asset in a certain period.

Over a period of time, the price of an asset, be it stocks, forex, or even crypto, is expected to fluctuate in the area between these two lines. However, it is possible that price fluctuations within a certain period will penetrate one of the two.

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The condition of price fluctuations has broken through resistance levels and support level this is called a breakout.

What is a Breakout in Trading

Breakout is a condition where the price movement of the asset breaks the level support and resistance of the historical price of the asset. The breakout phenomenon can indicate the continuation of the price trend, especially if it is accompanied by other indicators such as a high amount of trading volume.

Breakout is divided into two types, namely: true breakout and false breakout. True breakout is a condition where the price movement manages to break through the resistance or support level without being accompanied by a price reversal (reversal). Usually this type of breakout is characterized by high trading volume when the breakout occurs. The term breakout is commonly used in trading any asset from stocks, forex to crypto.

Otherwise, false breakout is a condition where the price movement has indeed managed to break the level resistance or support but not long after reversal (reversal). Generally this phenomenon is characterized by a small amount of trading volume when the price manages to break through the limit.

How to Identify a Breakout

You can see this aspect of trading volume and breakouts in the display chart candlestick. Body candlestick will look fat if there is a lot of trading volume and will look skinny if the trading volume is small. False breakout can happen if only tail candlestick which penetrates the price while the body does not.

However, so that the analysis you do can be more accurate, you should complement the analysis with other technical indicators such as Bollinger bands or the RSI index. Thus, you can predict whether the price of the asset will soon reverse or not and can determine entry and exit levels correctly and accurately.

What Does Breakout Indicate?

Breakouts can indicate a continuation or trend reversal depending on the type of breakout you encounter. If the type of breakout is true breakoutthen most likely the trend of the price movement will continue whether it is an uptrend or a downtrend.

On the other hand, if what you meet is false breakoutthen it is possible that sooner or later the price movement will return to normal or even lower or higher.

Breakout Example

Figure 1: Breakout Example (Source: Investing.com)

In the picture above, you can see a red line stretching from left to right. The line is a line of resistance or a line that connects some of the highest price points of an asset.

In the picture above, there are two types of direct breakouts, namely false breakout represented by the red circled dots and true breakout at the end of the curve. If you observe, the four red circled dots have one thing in common, which is only the tail candles which breaks through the resistance point. Therefore, do not be surprised if not long after the price fell again.

On the other hand, at the end of the curve there is a green, fat and elongated candle that has successfully crossed resistance levels. Here it happens true breakout. This is confirmed by the subsequent consistent upward movement of the price curve.

How to Trade During Breakout

1. Determine the resistance and support levels first

To define when the price of an asset will break the lower limit (support) and the upper limit (resistance), of course you must know in advance what the lower limit level and upper limit level of the asset are first.

The trick is to observe asset price movements for some time first and then draw the upper and lower limits from one point of the price curve to another.

This is very important so that you can know when the asset will experience a true breakout. Especially if the asset you are buying is forex given that forex is one of the assets with the highest price fluctuations in the world.

2. Use candlesticks

If you observe the writing above, it is clear that the candlestick is the most suitable tool to determine the breakout. This is because in the curve displayed in the form of a candlestick, traders can immediately know the important aspects of trading at that time, from the opening price, closing price to trading volume at a glance.

Therefore, to be able to determine when a breakout will occur, traders also need to master how to read candlesticks correct and know candlestick patterns. Because, each candlestick pattern can indicate a different trading signal.

3. Determine the right exit strategy

The exit strategy here can be in the form of placing a stop loss but it can also be a take profit strategy. You can apply a stop loss if according to your estimate there will be a true breakout that breaks the support level so that the price will fall again.

The take profit strategy is an exit strategy that you do when the breakout breaks the resistance level. Even if you predict that the price will rise again, it is important to adhere to the take profit strategy that you have created.

The goal is that you can avoid being greedy and avoid unnecessary losses. Of course, no matter how accurate a trader’s estimates are, no one knows when the price of an asset will stop crawling up and turn back down again.

This exit strategy can be done by selling the asset you want at a certain price or a certain amount. Whatever you choose, try to sell the asset quickly so you can avoid unnecessary losses.

4. Is it profitable to buy forex during the breakout?

Buying forex or other assets on the eve of a breakout can certainly be profitable, especially if you are a scalper or a trader intraday traders. Provided of course you know what kind of breakout will take place. True breakout will certainly be profitable if the price breaks the resistance level. On the other hand, a false breakout will be profitable if the price breaks the support level.

Conclusion

Breakout is a phenomenon that occurs when the price of an asset, including forex, moves through a resistance level or support level. This phenomenon is divided into two, namely: true and false breakouts. Both can be seen through candlesticks and can be profitable if accompanied by a strategy entry and exit appropriate.

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