Plus you’ll get my watchlists, breakdowns of the trades my top students and I make, and MUCH more. You might even wait for the third candle — it depends on the catalyst, the candle period, and your trading plan. I always look for the biggest percent gainers with news catalysts. Those are the stocks that have the potential to run and keep running. Trading halts usually occur when a flood of buyers or sellers rush into a stock all at once. There’s more than one way to play a breakout, and different types of breakouts present different opportunities.
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. News-based breakouts occur when the price of a stock gaps up or down on high volume following a major news announcement about the underlying company. Positive earnings reports, clinical trial results, or new product launches catalyse upside breakouts, while regulatory actions, lawsuits, or CEO departures spark downside moves. The key is determining whether the news event is substantive enough to drive sustained buying or selling pressure after the initial spike.
This shows that the bulls are showing strong signs of momentum and eagerness to break free of the resistance zone. Though the price tries to breakout again, even in its second attempt, the volume didn’t increase to fuel the breakout, Thus, it retested and falls back within the resistance zone. The securities quoted in the article are exemplary and are not recommendatory. The investors should make such investigations as it deems necessary to arrive at an independent evaluation of use of the trading platforms mentioned herein. The trading avenues discussed, or views expressed may not be suitable for all investors.
How to Avoid False Breakouts 💴
After the first breakout in late January, the stock started to consolidate around $14 per share. It stayed there for three or four months before breaking out again. Again, it gives you the chance to potentially play both sides — if you’re prepared.
This pattern is formed by two parallel horizontal lines representing support and resistance levels, with the price oscillating between these levels. The upper horizontal line acts as the resistance level, above which the price struggles to move, while the lower horizontal line serves as the support level, below which the price finds buyers. The key aspect highlighted is the sudden spike or increase in trading volume, which is indicated by the tall green bars on the volume panel. This significant increase in volume is accompanied by a price breakout, where the price moves above a resistance level marked by the horizontal red line on the price chart.
The longer a stock stays in consolidation, the stronger the breakout tends to be as bears get blindsided. Breakouts refer to that situation when the price of a stock or commodity moves beyond a certain level of support or above its resistance level. A stock moves above a long-term resistance level of $50 with high volume, indicating a breakout. The only thing worse than a failed breakout, is something called a false breakout. A false breakout is where the price does experience a breakout, but then lots of investors begin to dump their stock very fast.
- As fun as it would be to ride the wave and see how high of profits you could amass, this is a very dangerous strategy.
- As a result, breakout trading strategies tend to work better when applied to actively traded large-cap stocks rather than lower-volume penny stocks.
- It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication.
- If you always go for home runs, you’ll end up striking out more often than not.
- Instead of hurrying to open a position the moment a stock hits a new level, hold back and wait to see if the movement sticks.
Top screeners to spot growth, value, and momentum stocks.
Anticipating a price drop, they leverage more shorts building up a larger position than normal. To their horror, instead of pulling back down into the range, the price doesn’t pullback but instead proceeds even higher as volume rises. The short-sellers start to cover their positions quickly to stop the bleeding. Breakouts aligned with improving market internals and emerging late in established trends have higher continuation odds. Closing beyond major moving averages and breaking out of chart patterns provides additional technical confirmation. Positive/negative momentum divergences before upside/downside breaks signal likely inflection points.
Look For a Popular Asset 💰
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