Updated on March 3, 2023
A breakout is a price movement that occurs when the price of an asset exceeds a previously established resistance or support level. It can be either bullish (breakout above resistance) or bearish (breakout below support) and is often seen as a signal of a potential trend reversal or continuation. In technical analysis, breakouts are used to enter or exit trades and can also provide important information about market sentiment and the potential for future price movements.
Trading using Bullish/Bearish Breakout
In a bullish breakout, a trader would enter a long position (buy) when the price breaks above resistance. In a bearish breakout, a trader would enter a short position (sell) when the price breaks below support.
What are the steps to follow when trading breakout stocks?
The steps to follow when trading breakout stocks are:
Identify key levels – Determine the key levels of support and resistance for the stock you are interested in trading.
Monitor price action – Keep an eye on the price action of the stock and look for a confirmed breakout above resistance or below support.
Confirm the breakout – Wait for the price to break above resistance or below support and close outside of the key level before entering a trade.
Place a trade – Once the breakout is confirmed, enter a long position (buy) for a bullish breakout or a short position (sell) for a bearish breakout.
Set stop-loss – Place a stop-loss order to manage your risk and limit potential losses.
Set profit target – Set a profit target to lock in profits or use a trailing stop-loss to protect profits as the price moves in your favor.
Monitor the trade – Regularly monitor the trade and adjust your stop-loss and profit target as needed.