#BreakoutTradingStrategy

Guide to Technical Analysis

7 Reasons You Haven’t Received Your Tax Refund

Close

Breakout trading is used by active investors to take a position within a trend's early stages. Generally speaking, this strategy can be the starting point for major price moves, and expansions in volatility and, when managed properly, can offer limited downside risk. Throughout this article, we'll walk you through the anatomy of this trade and offer a few ideas to better manage this trading style.

What Is a Breakout?

A breakout is a stock price moving outside a defined support or resistance level with increased volume. A breakout trader enters a long position after the stock price breaks above resistance or enters a short position after the stock breaks below support. Once the stock trades beyond the price barrier, volatility tends to increase and prices usually trend in the breakout's direction. The reason breakouts are such an important trading strategy is because these setups are the starting point for future volatility increases, large price swings and, in many circumstances, major price trends.

Breakouts occur in all types of market environments. Typically, the most explosive price movements are a result of channel breakouts and price pattern breakouts such as triangles, flags, or head and shoulders patterns. As volatility contracts during these time frames, it will typically expand after prices move beyond the identified ranges.

Regardless of the timeframe, breakout trading is a great strategy. Whether you use intraday, daily, or weekly charts, the concepts are universal. You can apply this strategy to day trading, swing trading, or any style of trading.

Finding a Good Candidate

When trading breakouts, it is important to consider the underlying stock's support and resistance levels. The more times a stock price has touched these areas, the more valid these levels are and the more important they become. At the same time, the longer these support and resistance levels have been in play, the better the outcome when the stock price finally breaksout