What is the difference between a breakout and a breakdown in Technical Analysis, and how can you trade them? (2024)

Key takeaways from this article

• Confirm with indicators:

  Before trading a breakout or breakdown, use tools like volume and candlestick patterns to confirm the move. This step helps you avoid false signals and positions you to capitalize on true market shifts.

• Assess volume efficacy:

  When analyzing volume during a breakout or breakdown, consider its immediate impact on price. High volume without significant price movement suggests the trend may not persist, guiding your entry and exit points.

This summary is powered by AI and these experts

• Scott Boulette Algorithmic Trading
• Prakash Sharma Investment Professional at Sharma…

• Scott Boulette Algorithmic Trading

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  The terminology breakout/breakdown refers to the direction of the break. Trading a break requires first and foremost a mechanism for confirming the break that includes being able to differentiate between a retrace of the break that then continues vs. a "break in" where the price moves back into a neutral price range signaling that the breakout was a false or incomplete signal.While volume is very important, not all volume is of equal weight. One way to differentiate they type of volume is to measure the efficacy of the volume. High volume on the side of the break that does not produce an equivalent price move virtually immediately is a strong indicator the move will not continue.

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• Prakash Sharma Investment Professional at Sharma Finserve

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  Theortically there is only one term "BREAKOUT" There is nothing called "Breakdown"This is as per my learning and understanding (CMT Reading Material can be consulted)Now since there is only term , so there is no question of difference. Breakout is a techncial analysis term. It mean price of an asset (equity or commodity or forex etc) coming out of a range which can termed as consolidation sometimes and sometimes price patterns such as triangle , rectangle , cup n handle , trendline support / resistance etc.Breakout of price can happen on anyside , may be upside and may be downside.Hope I am able to answer your question.Thanks & regards

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• Andrew Keene CEO and President at BZB Entreprises Inc: Education Firm

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  There is NO technical analysis that is consistent with a sharp ratio over 2.0 and win rate over 60%PERIODIf people want to make up things it isnt true

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• Tejinder Singh Kodha,CMT® Associate Team Lead at Morningstar | Wealth Management Products

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  Breakout happens when price moves up after a period of consolidation and goes above recent pivot high or resistance zone.Breakdown happens when price moves down after a period of consolidation and goes below recent pivot low or Support zone.Reliability of the Breakout or Breakdown is increased with spike in volume. If the volume is average or below average then there is a high probability that it is Trap and price will reverse in opposite direction.

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• Yemmie Olaleye (CMSA®, FTIP™) ✪ I help individuals make informed & strategic decisions in the financial market; charts into profitable opportunities.Market Analyst| Coach| Mentor| Thought leader| FuturistCFI: FMVA®| CMSA®| CBCA™| BIDA®| FTIP™| FPWM

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  The two terms defined can actually mean more than terminologies to some technical analysts. Breakout has gained popularity enough and became a strategy in the market, not a holy grail though. A price rallying within accumulation phase will surely breakout above or below and turn the broken support to resistance or vice-versa.Traders can make entry plan based on that.Breakdown as well indicates a well defined opportunity for traders to take market execution at an optimal price level.

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• Momen Elsady Wealth Management Expert | Financial Strategist | Advanced Options Trader

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  The most effective method I've discovered for spotting Breakouts and Breakdowns is to closely monitor the volume when a level is breached. A surge in volume during the level break serves as a clear indicator of the move, and subsequent candle formations with wicks and tails post-break confirm the momentum. Breakouts and breakdowns are among the top and most practical strategies in day trading, requiring consistent daily practice to adeptly identify these key levels.

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• Yemmie Olaleye (CMSA®, FTIP™) ✪ I help individuals make informed & strategic decisions in the financial market; charts into profitable opportunities.Market Analyst| Coach| Mentor| Thought leader| FuturistCFI: FMVA®| CMSA®| CBCA™| BIDA®| FTIP™| FPWM

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  The simplest way is to have patience and wait for the market to do its thing.Do not be bias-attached to the running market.When it breakout or breakdown, wait for the momentum and volume indicator and candlesticks formation and pattern to confirm that before executing trade.

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• Bhadresh Kumar Shah

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  I have explained earlier be upgraded with skill continuously with following price action in different time frames 😃All Patterns above is an outcome of Trading taking place on a trading platform by all types of traders ( with or without skill )So be a part of the skilled traders journey and not novice one

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• Anderson França,PQO

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  Para se identificar ruptura/avaria além de padrões gráficos utilizo mais uma ferramenta chamada, “saldo de agressão” como a maioria dos rompimentos(ruptura/avaria) são falsos essa ferramenta ajuda o trader não cair nas ciladas do mercado.

  Translated

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• Franco Macchiavelli, EFA Responsable de Análisis en Admirals | Speaker Independiente | Mercados Financieros | Macroeconomía | Prensa y Medios

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  Regardless of a breakout, whether it's from channels, trendlines, or periods of sideways movement, it's crucial to consider the different market cycles and their fractality in trading—referring to the repetition of patterns at various time scales in financial markets.This means that price movements can exhibit similar patterns across different timeframes, be it in daily, weekly, or even intraday charts. Understanding primary, secondary, and tertiary trends is pivotal as they help us grasp the market structure. This insight allows us to project profit-taking strategies in line with the appropriate timing and timeframe to maximize the potential for success.

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• Momen Elsady Wealth Management Expert | Financial Strategist | Advanced Options Trader

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  My approach to trading breakouts and breakdowns is straightforward and effective, and I prefer to keep it that way as long as it delivers good performance. First, I draw support or resistance lines on the daily chart. Next, I closely monitor the intraday movements, particularly on the 3-minute chart. Once the level breaks and retests with the trend line (9EMA) maintaining the same direction, I initiate the trade. The stop loss is set at the level itself, and targets are determined based on further levels from the daily chart. This technique typically yields a risk-reward ratio of 2:1 or higher because the stop loss is tight, and the targets often involve larger levels.

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• RUPAK DE, CFA (ICFAI) Senior Technical Analyst at LKP Securities

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  My approach to trade breakout or breakdown is very simple. I take trade on breakout or breakdown when it is volume backed and significant resistance or support is not near. The price is above the critical moving average on that timeframe. Risk management part: consolidation low(for breakout)/high (for breakdown) should be ideal stop loss.

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• Yemmie Olaleye (CMSA®, FTIP™) ✪ I help individuals make informed & strategic decisions in the financial market; charts into profitable opportunities.Market Analyst| Coach| Mentor| Thought leader| FuturistCFI: FMVA®| CMSA®| CBCA™| BIDA®| FTIP™| FPWM

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  Breakout and breakdown trading strategy is advised to be simple and concise.I draw my traditional and diagonal support and resistance zone and level around the price ranging zone on higher time frame then, i will wait for the higher time frame level to be broken with increasing volume indicator indicating so as well.Then I will go to a lower time frame wait for retracement of the initial higher timeframe premium or discount level to hit on lower time frame before i consider longing or shorting. There are numerous ideas of what i can be waiting for at the discount and premium zones. Old lows and highs, rejection blocks, liquidity void zones and so on.

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• Caroline Mbi Ayuk Freelance Internet Marketer | Media Buyer | with an Entrepreneurial Spirit, Solving problems cheerfully, and producing positive results.

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  In my experience, a 10-day breakout or breakdown has proven to be highly effective. Assume an asset is trending downward and a close above the last day's high, would mean a point of caution. Could be a reversal. Check the chart of USDx Daily. There was a breakout on the 27th of July,2023, and a follow-through that lasted until Nov. 3rd, 2023, when a breakdown occurred and now a follow-through is on. There are other parameters you can add to confirm your entry. I am more focused on Forex.

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• Tyler Lovingood Research Associate at Potomac Fund Management, INC

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  The most simple and effective way that has been tested by many practitioners for decades is to trade many markets long/short using long-term breakouts. An example of a system could be to buy on a 200-day breakout, with a 5-ATR (average true range) stop. In that trade you will risk 0.20% of your equity and apply a trailing stop.

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• Srikanta Mukhopadhyay Internal Audit Executive || 8+ in Internal Audit of several clients e.g. (HUL/AMUL) || SAP/Excel || EFPM (IMI K), EMBA (IITKGP), M.Com (IGNOU) || 3X Top Voice ||

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  Among few other technical analysis signals breakout and breakdown are two most important signals often referred. In trading stocks these strategies can be very useful. If you want to go for long positions then breakout strategy is for you. On the other hand, if you go for short - sell then breakdown strategy is helpful for you.

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• Yemmie Olaleye (CMSA®, FTIP™) ✪ I help individuals make informed & strategic decisions in the financial market; charts into profitable opportunities.Market Analyst| Coach| Mentor| Thought leader| FuturistCFI: FMVA®| CMSA®| CBCA™| BIDA®| FTIP™| FPWM

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  Breakdown and breakout trading strategies may vary from one technical analyst to another but the end goal should be able to pass the test of profitability and sustainability in the long run. Try to back test and execute these on demo for a quality number of time to gain more insight than mere reading. You'd be great at it.

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• Manuel Lever Experto en divisas 💵💶💷💴Ayudo a que tu empresa reduzca sus costos y controle sus riesgos de tipo de cambio 🚀

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  An important point for take a trade in breakout and breakdown, is necessary see a volume increase because will it’s possible that false breakout or breakdown. In general I like to use simple indicators such Bollinger Bands, MACD and RSI. The above accompanied to resistance or support levels of longer term graphed in the chart and so see a really rupture to support or resistance level.

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• Paul Lange Founder at Disciplined Trading Strategies, LLC

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  Whether you are doing a breakout or breakdown, it has nothing to do with whether it’s ascending, descending, or symmetrical triangle or any of the other garbage cookie cutter terms that you hear. It has to do with where that consolidation appears in the price cycle. If you seriously want to make money, watch a new trader and whenever they buy a breakout, shorted immediately after they get in long and you’ll do very well. Learn technical analysis at an A+ level and it all becomes clear. Most traders go long on a “break out” when they should be shorting the new high. Maybe you are aware of that as you have stopped out of break outs so often.

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  In summary, breakouts and breakdowns are chart patterns used for identifying potential trading opportunities, each signaling different directions in future price movements. Breakouts occur when the price breaks above resistance, typically seen as bullish, while breakdowns happen when the price falls below support, considered bearish. Successful trading involves considering factors such as the strength and location of the breakout or breakdown, aligning with the overall market trend, and using stop-loss orders to manage risks. It's crucial to do thorough research, employ a trading plan, and practice risk management when utilizing these patterns for trading decisions.

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