A breakout is when particular prices pass through a point of resistance or support and remain through that area of resistance or support. Typically on the chart there is a breakout when price of an asset or pair breaks out of a lower range pattern or area. This can then indicate that the underlying asset or stock has moved into oversold conditions and is set to reverse direction within a short period of time.
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Breakouts can appear at any point in time during a trading day and they can last from minutes to hours depending on market conditions. Usually traders wait for a period of time after a breakout before entering a position as this gives them time to absorb the sell signals from the breakout and mentally or physically take the sell signals as fact. Traders who are entering a position based on a breakout will be taking advantage of a low concentration of buyers in a particular region on the chart, which means the opportunity to make a quick move into the profit zone can be there.
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What is a breakout: Patterns
There are two main types of breakout patterns on charts; rising or falling wedge and square formation retests. Rising wedge retests occur when a price bounces between two moving averages, usually in a rising direction. As these averages break down they repeat in either direction and this results in a new high or new low. Square formation retests are used when a price bounces between two support areas, usually in a declining direction.
A breakout is defined as when the market moves beyond a recent support or resistance level and goes on to move up or down in trends. Breakouts signify the possibility for the trend to begin trending in the breakout direction. For instance, a breakout from a sideways chart pattern to the downside from a pattern may indicate that the trend will begin to trend upwards. Likewise, a breakout from the top of a ranging pattern to the downside from a breakout pattern may indicate that the trend will begin to trend downwards.
Reasons
The breakout can be caused by a number of economic factors. Tight spreads (high volume in a particular time frame) can result in breakouts. Economic weakness can also prompt large movements in market prices, driving volumes and forcing traders to take profit quickly. Other factors such as news events and general world events that are expected to affect the markets can also encourage traders to take profit before the news becomes public.
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Most breakouts occur when there is high volume in a particular time frame. High volume usually indicates a strong demand from the market, which pushes prices upward. In order to see if you have an opportunity to profit from it, it is important to identify its reversal high-point, which is the point at which the breakout trades reverse to begin its downward movement. At this time, sellers begin to pressure prices in an attempt to acquire the upper hand in the trade. When this happens, the trend reverses out of the breakout direction and typically stays in this direction for several days, acting as a base stage in price movement.