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Breakout Trading

Big Idea: Breakout trading is essentially when price breaks above or below a support or resistance level. Lots of traders like this type of trading because of its potential volatility upon the breakout. Although this style can help traders make significant gains, they don’t always work out, which is called a “false breakout”.

Example

This is an example of a real breakout. Price tests highs three times which makes it a strong resistance level. When price hits that level for the fourth time, it finally breaks above, and candles continue to push upwards shortly after. One thing that is important to look for is how the candle closes on that specific time frame. For a breakout to occur, the candle must usually break above and close above resistance. Otherwise, you could be looking at a false breakout.

This is an example of a false breakout. Here, price tests resistance and breaks above. However, price cannot maintain itself at this level and comes back down leaving a long wick on the top of the candle. Price failed to close above the resistance zone even though it touched above it; that means price will have to make a second test to see whether or not it can really break out.

Key Takeaways

-A breakout is when price moves out of a channel with heavy volatility to the upside or downside

-A true breakout usually occurs when price rises above or below support or resistance and closes above/below

-A false breakout happens when price breaks above or below a certain level and cannot keep momentum in that direction.

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