Breakout trading is one of the most popular trading methods used by traders.
What is Breakout? - A breakout is a pattern in which stock price moves outside a defined support or resistance level with increased volume. It sets the stock for a much bigger price action.
What happens in a breakout?
The stock moves past the resistance area. You can imagine a situation as if stock has broken the chain and is ready to run. It alters the perception of traders on the stock and now the same resistance becomes a huge buying point and stock gets propelled by new momentum. Example: Chart Pattern Below. The stock was struggling at 57 but the moment, it went past it - the stock just zoomed to higher levels.
Source: ChartAlert [www.chartalert.com]
As you can see in the chart above, a breakout is a pattern in which stock price moves outside a defined resistance level with increased volume. It then gets followed by more trading action and strong price move in the direction of the breakout.
In markets, there is nothing called certainty. The breakouts also fail i.e. stocks breakout and then fail to follow through and slip back in the range. Hence, one should keep a 3% stop loss below breakout level as a protection strategy. Having said that, the probability of success is generally quite high in breakout; especially in bullish market conditions.