Individual shares in the stock market move either way with upside or downside movement as per the market conditions and micro factors. And when a stock breaks its trajectory or suddenly moves out from its trading range it means there is momentum.
This could be the best option to make the position in such stocks if such movement comes with a huge volume. A breakout or breakdown in the stocks makes such situations for the traders. Let’s find out what breakout and breakdown are in the share market.
What is Breakout and Breakdown in Share Market?
Breakouts and breakdowns are the kinds of indication of where stock is heading or when it comes from its resistance and support zones. This is used as one of the prime indicators while choosing the stock for intraday trading or investing.
Breakout in Trading Means
Breakout in the stock market usually means when a stock or commodity price moves above the resistance levels where the stock was moved many times but not rose beyond that resistance level. When a stock breaks such resistance it is called the breakout that could be a good buying indicator for the delivery-based investors or day traders.
Types of Breakouts in Trading
In trading different types of breakouts are commonly used by traders to know the chart patterns. These breakouts are divided into various categories, let's find out the significance of these breakouts and what they indicate for the traders.
Continuation Breakouts: When buyers and sellers take a pause or there is not enough either side movement in the stock, stock trades in a range-bound trajectory. And this kind of consolidation happens when recent breakouts. And when a breakout comes after the consolidation, the new trends start.
Reversal Breakouts: It is the opposite of continuation breakouts where the market or individual company's stock was in a particular trend before coming into the consolidation phase. And when it is going down after the consolidation it is called the downtrend breakout which breaks the consolidation phase before going down.
False Breakout: Apart from these two – uptrend and downtrend breakouts, there is another breakout called false breakouts. And when this breakout happens the price goes through certain levels but not continues in the same direction. There is a short spike in price that shows a false breakouts signal during the consolidation phase.
Positive Breakout Stocks: When a stock is moving in the upwards direction, and moves above a certain trading range signalling the buying signal it means there is a positive breakout in stock. One of the most common technical indicators – when a stock breaks and trades above 200 days moving average, it is called the positive breakout.
Breakout Stocks with High Volume: When there are breakouts in stock and it comes with huge volume (more than the daily average volume) it can be a positive signal, that stock price is expected to move in the same breakout direction.
How to Identify Breakout in Stocks?
The use of breakouts in stocks comes when you identify such breakouts timely and take a decision to make the position in the stocks. To Identify the breakout in stocks, there are various technical indicators, like chart patterns etc., that can be used.
Breakout Using Technical Analysis
Traders use the support and resistance levels, moving averages, Bollinger Bands and trend lines with chart patterns to find the stock that breakouts. However, there are various other things like volume breakout in a stock also signal a breakout in stocks.
Breakout Using Fundamental Analysis
Apart from technical analysis, you should also look out for the stocks of companies that are fundamentally strong. The stock of a company with encouraging financial growth, promising industry development and other favorable factors, makes a stock good for buying while considering a breakout when a stock moves due to these factors.
Breakout Stocks for Swing Trading
Traders use the Breakout stocks for swing trading using the various technical indicators to pick the stocks for short-term or long-term. Support, resistance and other popular technical indicators like moving averages, volume, ease of movement, relative strength index (RSI), and stochastic oscillator are used for swing trading.
And to find the breakout stock for swing trading you also need to learn more about swing trading and what are the indicators and strategies that are used to find out the breakout stocks.
Breakdown in Trading
Just like an upside trend in the stock market creating the breakouts, a breakdown in trading works but towards a downward movement. As the name indicates, when a stock falls and breaks a trajectory and comes down from this range, this is a clear indication of a breakdown in a stock.
What is Breakdown in Trading?
Usually when a stock, breaks the support levels with huge volume growth in trading. And to identify the breakdown, traders use various technical tools like chart patterns, moving averages, relative strength index and trend lines.
Traders consider Breakdown as a bearish signal and use it for the sort of selling or exiting from the long positions they held in stocks or any other tradable financial instruments like commodities, crypto currency and currency trading in the financial markets.
Breakout and Breakdown Strategy
Using a breakout and breakdown strategy for trading could be a profitable journey. Yes, if you are looking to make a long position in any stock you can use a breakout. While if you looking to short-sell a stock you use the breakdown along with other technical indicators. Breakout and breakdown are the early-stage signals of a trend reversal in any stock.
Breaking the support or resistance is another breakout and breakdown strategy you can use for trading. When a stock trades above the resistance levels, it is a breakout signal, whereas, when a stock goes down the support levels it is a breakdown signal.
Breakout and breakdown are two important signals in technical analysis, widely used to formulate effective trading strategies in the stock market.
52-Week High Breakout Stocks Strategy
A stock heading towards the 52-week high and breakout could be one of the promising trading strategies traders use for buying the stocks. A stock trading above 52 weeks means it is at its highest price in the last year and it could be a good signal. This is considered the resistance level where the stock stops and if this resistance breaks it is a breakout.
All-Time High Breakout Stocks Strategy
Similarly, when a stock is trading at its lifetime high and when breaks a certain pattern or trading range it could be one of the best breakout strategies for buying a stock. These stocks are usually considered fundamentally strong and always in an upwards or bullish trend making a new high whenever the market moves in the positive direction.
However, some rules should be kept in mind while using the all-time high breakout strategy. While trading with an all-time high, also include the categorization of breakouts progress through phases, review the pattern structure into a breakout, locate the hidden resistance levels and also find the profit protection prices for cautious trading.
200 DMA Positive Breakout Strategy
In technical analysis, moving averages are one of the strong tools used to make decisions while trading. And 200-Days Moving Average is one of the strongest signals considered for buying signals. When a stock trades above the 200 DMA, it is a breakout signal that shows the stock is in an uptrend and can be used for buying with the potential to give returns in the near term.
Bollinger Band Breakout Strategy
Bollinger Band is another one of the most popular technical indicators used for trading in the stock market. It helps to know that stock is either in overbought or oversold zones. And three lines lower, middle and upper are drawn to create a Bollinger band is a moving average that is determined by the trader as a parameter to buy or sell the stock in trading.
And when a stock is moving above the Bollinger Band range it is called the Breakout making a strong signal for buying the stock. But to make this indicator more authenticated, also check the volume, if the breakout is with high volume there is a positive signal of buying the stock. In the breakdown strategy use the Bollinger Band if the stock moves downwards.
Positive Breakout with High-Volume Stocks
Sometimes a sudden spike or unexpected moves in stock is noticed while trading. This should be not considered as a breakout or breakdown, instead use other signals like volume growth and technical indicators with positive breakouts as good signals.
The volume growth in stock does not come unusually, when there is strong buying or selling, then a large number of traders and investors make positions in such stocks. Apart from analyzing the charts and volume bars, you can use the average daily volume of the stock to compare if the breakout in stock is a significant volume or just a speculative move.
Breakouts and breakdowns are one of the most interesting trading strategies that can be used for intraday trading or delivery-based short-term trading. Though, for confirmation of such breakout and breakdown also use other technical indicators.
Candlesticks Chart patterns, triangle formation, volume growth and moving averages crossover and relative strength index are the popular technical indicators that can be used along with breakout and breakdown for making your trading strategies more profitable. And using such indicators is not easy and effectively possible for normal investors or traders.
Thus, Moneysukh is right here providing the stock broking services with a strong research team of fundamental and technical analysts. You can open a trading account with demat and enjoy trading tips and daily recommendations for buying and selling stocks with the highest accuracy. You will get stock tips based on breakouts, breakdowns and other popular technical analysis scanner that are used for making trading more profitable and less risky.