A breakout occurs when the price of an asset crosses above a resistance level or below a support area. Breakouts suggest that the price may begin to trend in the direction of the breakout. A breakout to the upside from a chart pattern, for instance, can signal that the price will begin to trend higher. High volume breakouts (compared to typical volume) demonstrate more conviction, which increases the likelihood that the price will trend in that direction.
Overview
A breakout occurs when the price breaks a resistance or support level.
Not all traders employ the same support and resistance levels, therefore breakouts can be subjective.
Generally, breakouts give traders the green light for entering a trade. Upward breakouts signal traders to buy or cover short positions. A negative breakdown suggests traders short or sell long positions.
High-volume breakouts reflect conviction and interest, therefore the price is more likely to follow the breakout.
Low volume breakouts are more likely to fail, hence the price is less likely to follow the breakout.
Meaning of Breakouts
The price breaks through a resistance or support level after being contained for some time. Many traders utilize resistance or support levels as entry or stop loss points. When the price breaks through a support or resistance level, traders who were looking to enter a trade take advantage of the breakout and jump in. On the other hand, those that were looking to exit a position or was expecting a different move, get out of their trades to prevent further losses, or to take profit.
This action often causes volume to grow, showing high interest in the breakout level. High volume confirms the breakout. If the breakout has low volume, the level may not have been noteworthy to many traders, or not enough traders were ready to trade near it. Low-volume breakouts often fail. If an upside breakthrough fails, price will return below resistance. If a bearish breakout (often referred to as breakdown), fails, the price will return above the support level.
Breakouts are often connected to consolidation patterns such as triangles, flags, wedges, rectangles and pennants. When the price moves in a certain way, support and/or resistance levels arise. Then, traders watch for breakouts. They may go long or short if the price breaks above resistance or below support.