Anatomy of Trading Support & Resistance Breakouts

At this point, both retail and institutional fence-sitters jump in, trying to catch the upward surge. The price and momentum bring in volume, with the last short-sellers covering their positions. The stock is now hitting intraday scanners, and even CNBC has begun discussing the new breakout.

Volume should be at least 40% greater than its average volume. In many cases, the volume increase will be far greater than that. A stock doesn’t get far if fund managers are not behind the breakout. We also offer real-time stock alerts for those that want to follow our options trades.

  1. This generates an uptrend as prices form higher highs while sustaining higher lows.
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Setting a stop higher than this will likely trigger an exit prematurely because it is common for prices to retest price levels they’ve just broken out of. When trading breakouts, it is important to consider the underlying stock’s support and resistance levels. The more times a stock price has touched these areas, the more valid these levels are and the more important they become. At the same time, the longer these support and resistance levels have been in play, the better the outcome when the stock price finally breaks out. Typically, the most explosive price movements are a result of channel breakouts and price pattern breakouts such as triangles, flags, or head and shoulders patterns.

Discover how to trade – or develop your knowledge – with free online courses, webinars and seminars. Melrose Industries was stuck between 43 and 61 for almost four years from the middle of 2012 to 2016. Its subsequent breakout was spectacular, moving above 150 by the end of 2016 and up above 220 in 2017.

Time Period Breakouts

It is a technical analysis term defining a price movement that passes a resistance level. This can happen on any time frame and is always best when confirmed with volume. A breakout will typically be accompanied by increased volume, which indicates that the buying/selling demand is more than the supply, and the price follows. Breakouts are the beginning of trends in a security’s price. We will explain why breakouts happen, their types identifying them, and how best to trade them. A breakout trader will typically enter a trade when the price moves beyond the support or resistance level they have identified.

The trading range tends to have a defined support and resistance level that can be identified with various chart indicators including trendlines and moving averages. While consolidations imply a lack of interest, it can be Signals united inc scam thought of as the calm before the storm with one side (buyers or sellers) playing possum. The light volume represents a lack of interest and complacency, at least that is what one side wants the other side to believe.

Breakout stocks with high volume

Quiet periods are often followed by larger price movements and a subsequent breakout. In the Alibaba stock chart below, we can see that Alibaba shares showed this pattern before doubling in price over the next year. A breakout above the Bollinger Band signals a potential breakout.

You can apply this strategy to day trading, swing trading, or any style of trading. Consolidations are interpreted as an extended period of basing or base building after an immediate trend takes a “rest”. This resting period is identified by the light volume and flat to choppy price range. The longer a stock stays in consolidation, the stronger the breakout tends to be as bears get blindsided. If the price breaks out on lower-than-average volume, this means that few people are interested in buying the stock above the breakout point.

You can use a profit target or calculate the risk/reward ratio to see if the trade is worth it, or a trailing stop loss, like in the Bollinger Band example above. We have a basic stock trading course, swing trading course, 2 day trading courses, 2 options courses, 2 candlesticks courses, and broker courses to help you get started. We don’t care what your motivation is to get training in the stock market. If it’s money and wealth for material things, money to travel and build memories, or paying for your child’s education, it’s all good.

Entry points are fairly black and white when it comes to establishing positions on a breakout. Once prices are set to close above a resistance level, an investor will establish a bullish position. When prices are set to close below a support level, an investor will take on a bearish position. When considering where to exit a position with a loss, use the prior support or resistance level beyond which prices have broken. Placing a stop comfortably within these parameters is a safe way to protect a position without giving the trade too much downside risk.

Trade on potential breakout stocks

The heavy volume is a strong sign of conviction as the buying frenzy spikes prices to new highs. This generates an uptrend as prices form higher highs while sustaining higher lows. Very importantly, the prior resistance level should become the new support level. To determine the difference between a breakout and a fakeout, wait for confirmation. For example, fakeouts occur when prices open beyond a support or resistance level, but by the end of the day, they wind up moving back within a prior trading range. If an investor acts too quickly or without confirmation, there is no guarantee that prices will continue into new territory.

Bollinger Band breakout stocks

Volatility, momentum and liquidity are the key traits that attract traders to a stock. Often times, there is a fundamental catalyst that actually triggers the breakout including news, events or rumors. This draws more traders to the stock as early as pre-market which may cause the stock to gap. Breakouts can occur throughout the day after the price has rested or reversed. Not all breakouts end in profit, as prices could always end up moving the other way, resulting in a loss.

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