Glossary   »   B   »  Breakout
published-date Published: October 7, 2023
update-date Last Update: November 9, 2023


What Is a Breakout?

A breakout is when an asset’s price surpasses certain thresholds, such as resistance or support areas. This indicates a potential trend shift. For instance, if there’s an upward movement from a chart pattern, it may hint at an uptrend. High-volume movements signify strong conviction.

A breakout happens when the price of something like a stock or commodity goes past a known barrier, like the usual high or low points where it usually turns around. This could mean it’s starting a new trend. If the price shoots up through a resistance level with a lot of trading happening, it’s a sign that the new trend has a lot of support.

What Breakouts Signal

Breakouts show up after prices have been bouncing between set high and low points. These points help traders decide when to buy or sell. When the price crosses these points, it gets traders to act – some start buying, and others sell to avoid losing more.

When lots of trades happen as the price crosses these levels, it’s a good sign the trend will stick. But if not many trades are happening, the breakout might not last. Sometimes, even with a lot of trading, the price might slip back before it really starts moving in the new direction.

Patterns like triangles or flags on charts often lead to breakouts. Traders watch these patterns to see which way to bet.

Examples of Breakouts

Imagine a stock price that jumps during a big news release and pushes past its usual high point. Without falling back, this strong move tells traders the trend is powerful.

Investors might jump in based on this, setting up a stop loss order just in case things don’t go as planned. As the price moves, they might move their stop loss to match.

Breakouts vs. 52-Week Highs/Lows

A breakout could set a new 52-week high if it’s close to the old one. But a 52-week high is just a year’s top price, not necessarily a breakout.

The Limitations of a Breakout

This method isn’t foolproof. Prices might poke through the key levels only to pull back again. Plus, deciding where these levels are isn’t an exact science. Keeping an eye on trading volume can help figure out if a breakout is for real.