technical analysis

What are Breakouts?

Daksh Murkute | | |

Breakouts trading is a price action trading style and if done right, could be very lucrative for the trader.

 

But, what are these breakouts and why do traders pay so much attention to it? You’ll find all the answers in this blog post.

 

Read this blog post till the end as I’m going to tell you everything you need to know about breakouts, why they occur, and also why you should be trading them.

Contents

 

 

What are breakouts?

Price is never going to move up or down all the time with ease, there will be times when price faces difficulty in moving past a level.

 

Will it always face this difficulty? No, it will move past it at one point. This is what breakout is.

 

Imagine yourself as a child and are sitting in a boring class, for me it was history. You’re just looking at the clock and waiting for the class to end.

 

Just when the bell rings for home time, you take your bag and run out of the classroom, that’s what breakout is like.

 

Well, that’s not what really happens in the market, but yes, decent enough analogy.

 

Breakouts happen all the time in the market and on each timeframe, you need to be there at the right time and at the right place to spot them.

 

 

How to identify breakouts?

As I said, breakouts are literally price breaking out of a level or structure after having difficulty getting past it.

 

Now, what are these levels or structures? It could be trendlines, support or resistance levels, or it could even be a range that the price is stuck inside.

 

So identifying breakouts or spotting them on the charts is quite simple and straightforward.

 

What are breakouts?

 

You need to see if the price is stuck in a range, if there is a trendline that is forming and is not letting the price get past it, or if there is any support or resistance level that is holding the price.

 

What are breakouts?

 

The level or the structure won’t always keep holding the price right and the price will get past at some point and you just have to wait for this to happen.

 

What are breakouts?

 

Once you see that something like this is happening, you can straightaway know that a breakout is happening.

 

But wait, is it that simple? Nope, I’m sorry. There’s something important that you need to know about breakouts before you actually start looking for them on price charts and trading them.

 

 

What do you need to know about breakouts?

As I’ve said already, price spends a lot of time within levels, ranges, or even trendlines and it even won’t stay in it all the time.

 

There will be times when the price breaks outs of them, but will it always be a breakout?

 

No, there will be times when it will seem like the price is breaking out but it eventually fizzles down and goes back into the range.

 

What you need to know about breakouts?

 

This is something that each and every trader hates and it’s known as false breakouts or fakeouts.

 

You won’t believe that the price may have multiple fakeouts before it actually breaks out of the level that it spend a lot of time in.

 

As a trader, there’s very little that you can do about this and if you want to know how to deal with these fakeouts exactly then check out the blog post I’ve uploaded on secrets of breakouts.

 

 

 

Why do breakouts occur?

To understand why breakouts occur, you need to know the three phases that the price normally goes through, this is accumulation, advancing, and declining.

 

As the terms advancing and declining suggest, the price is either going or is going down respectively. This is what we know as the trending phase too.

 

Coming to the most important phase, accumulation, it is when the price is stuck in a range and you will see that it is just moving sideways without having any purpose or aim, but is that so? Not really.

 

Why do breakouts occur?

 

You should know one thing, the big players or the whales run the market. They are the ones that actually make the price move. How do they do it? By buying and selling in really massive quantities.

 

Now, when such whales have to build their position, they cannot just place one buy or sell order and sit back. They need to build their position over a period of time and that’s what the accumulation phase is.

 

It is in this that you’ll see that the price is just moving sideways and is in a range for quite some period of time.

 

Will the whales always keep accumulating? No right. They build their position with some rationale and when that happens, the price starts to move in their preferred direction.

 

This is when price moves out of the range and breakouts happen and this is where we can capitalize and earn the pips.

 

 

Why you should trade breakouts

By now I’m sure you know a great deal about breakouts but there may be a “why” question as to why should you trade breakouts, I’ll tell you why.

 

Price trends for only 30% of the time and it range for the remaining 70% of the time, I know I’ve said this already, just bear with me.

 

If the price trends for such less time then won’t be great if you could ride these trends whenever they form? It sure would be right.

 

Why you should trade breakouts

 

Just when price breaks out of the range that it was stuck in for some period of time, it tends to get into a trend and if you can get in on this breakout, you might just get in on the trend right when it is starting out.

 

If you manage to get in on trend right when it begins and if you ride it all the way, just imagine the pips you would profit.

 

 

Do you already trade breakouts?

Are you a breakout trader? If yes, then what strategy do you use to capitalize on such breakouts? Do let me know.

 

If you don’t already have a strategy that allows you to trade breakouts, then would you be interested in learning one?

 

Don’t forget to share this blog post with others and let them also understand the magic of breakout trading.

 

Feel free to ask questions or queries in the comments section and I’ll get to it for sure.

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