A breakout in technical analysis (TA) is when an asset’s price moves above a resistance level or below a support area. A breakthrough may signal the beginning of a trend in the breakout’s direction for the asset’s price.
High volume breakouts may be thought of as a stronger signal than breakouts with typical volume. There is a greater likelihood that the price will begin to move in the breakout direction if the volume is strong.
Breakouts can arise from price pattern breakouts, such as triangle, flag, wedge, head, and shoulders, or range or channel breakouts. Usually, a time of reduced volatility comes before a breakout.
The breakout will typically be more explosive the more extended the pattern has existed. Many traders may utilize the same price levels to set their stop-loss orders if the levels are well defined. Once those stop orders begin to be activated, they may have a cascading effect that causes a sharp price change.
Depending on the direction of the move, a breakout can be a buy or sell indication. Once the price has moved beyond the designated support or resistance level, a breakout trader may open a long or short position.
