What is breakout in share market - how does breakout works in share market

The share market is an equal opportunity space for all kinds of investors and traders. While most people prefer investing, i.e., buying shares and selling them at a future date, after booking a reasonable profit, most others prefer to enter into day-trades. Although day-trading is quite complicated, it enables traders to book profits in a shorter time frame. However, players in this market must leverage several strategies to their benefit. Many traders prefer the intraday breakout trading strategy. Here’s all you need to know about it.

What is breakout trading ?

What is breakout trading - how to trade breakout
What is breakout trading – how to trade breakout

Breakout trading is defined as a type of momentum trading, which requires the trader to enter and exit the intraday market quickly. In this type of trading, traders try to enter the market, when the script’s price moves outside a specific price range (which could be support or resistance). It requires traders to attempt to enter a trade right from the apex point, wherein the breakout is expected to happen. To make this strategy work, traders have to be both quick and aggressive and potentially trade in higher volumes. Also, traders don’t have to wait to know if the trade will work or not, as it becomes evident instantly.

How to read the breakout indicator?

Now that we know breakout meaning in the stock market, let’s understand the term, i.e. by reading trading charts and patterns. In intraday trading, breakout means to move below support or above resistance. Here’s how you can read the price breakout indicator:

1. From the first support and resistance, you will see a break of a previous candle’s low or high.

2. From the last swing’s high or low, you can gauge the shorter-term support as well as resistance

3. You can also see significant support and resistance

4. The trend line or moving average also appears in this trading chart.

What are the advantages of intraday breakout trading strategy?

What is breakout trading - how totrade breakout

Leveraging the breakout trading strategy can prove to be quite beneficial. When you employ this strategy, you will find that the momentum is almost always in favour of the trader. When you trade breakouts, you can enter your trade, knowing fully well that you have momentum is in your favour. Also, you do not have to ever worry about missing any moves that may be occurring in the market. As such, you can catch the significant trends as they occur, which may not come if you choose to employ most other strategies – pullback, for instance.

Breakout strategy for stocks

Breakout trading stock is not quite as simple as buying or selling when a breakout to the upside or downside occurs. Making the entry is only one part of a robust strategy: you will also need a stop-loss, which controls the initial risk of the trade. A breakout strategy for stocks also requires an exit point if the trade turns profitable. Unlike long-term investors, breakout traders nail down their profits periodically.

Each of the breakout trading methods discussed below involve both a stop-loss and a way to take profit. A stop loss should be placed on every trade so that no single losing trade will erode your account substantially, whereas the profit target is more flexible. You can use a profit target or calculate the risk/reward ratio to see if the trade is worth it, or a trailing stop loss, like in the Bollinger Band .

Before placing a trade, you must know what your entry, stop loss, and exit methods are in order to increase your chances of making a profit over time.

Breakout stocks with high volume

On a breakout, if you notice that volume has increased above average levels, this is a positive sign. It helps to affirm that the price trend is more likely to keep moving in the breakout direction. The bigger the increase, the better. A 50% increase over average is good, but 100%, or double the average volume, is even better.

If the price breaks out on lower-than-average volume, this means that few people are interested in buying the stock above the breakout point. This means the stock is less likely to hold above the breakout point and run higher.

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