A breakout is a term used in technical analysis to refer to asset price movements below a support level or above a resistance level, typically suggesting that the price will continue moving in the direction of the breakout.
What Does a Breakout Tell You?
Traders consider breakouts as possible trading opportunities in the market, depending on its direction. However, they are highly subjective as traders may not identify the same support and resistance levels on a given price chart.
A breakout accompanied by a sizably high trading volume is usually considered a strong breakout, and traders often take a position in the market at the breakout point. This is not always the case, however, as there are also false breakouts (sometimes called fakeouts), which is typically a sharp reversal in the direction of the breakout.
Breakouts are quite simple to identify, often occurring after a prolonged trend. The longer the trend of a particular asset, the bigger the breakout is expected to be. However, it is common practice to set a stop-loss when taking a long position around the breakout region to hedge breakout traders from fakeouts. If the breakout holds, traders tend to adjust stop-loss levels to lock in profits.