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What is a Breakout Trading Strategy

05 Jan 2023

The stock market is rife with equal opportunities for investors and traders of all types. The majority of investors and traders are interested in long-term investing primarily, that is, buying shares at a low price and selling high to rake in wealth. However,several other types of traders prefer day trading. There are many methods and tactics to indulge in this kind of trading, and breakout trading is one which you can find out more about here. 

  • What is breakout in trading?

Breakout trading strategy is a common way to trade for investors who may not want to hold shares for too long, and get into a trade fast and get out even faster. It is defined as a kind of momentum trading tactic in which a trader seeks levels that a share hasn’t been able to move above. When shares move beyond these levels of prices, or show potential to move this way, the term to represent this is a breakout. The trade is conducted when this happens. 

  • How a Breakout Strategy Trader Works

Traders who make use of a breakout strategy to tell when a share price moves beyond a certain level utilize technical analysis. They often depend on patterns in prices and trends to show how prices move in the stock market. For example, to make this clearer, a breakout trader looks for instances in which the price of a share or any security has shown resistance to moving over or under a certain price level. The trader then tries to profit by getting into a trade in the direction of a breakout. All the while, the trader assumes that the price will keep moving in the same direction. 

  • Support and Resistance

When you speak of breakout trading as a strategy used in online trading, it's important to understand the roles of support and resistance. A trader who uses a breakout strategy searches for assets that have been constrained to trading under a particular area (resistance), or over a particular level (support). The stock may have tried to break out many times, but without much success. However, a breakout trader believes that the stock will eventually break out of a confined space. When this happens, the trader tries to capitalize on the stock’s movement. So what does the breaking out of an asset really do? It serves as a sign for the trader to purchase or sell a specific security, according to the trend of the breakout - which may be bearish or bullish. 

  • Taking Stock of Strategies

A trader who is well-versed with a breakout trading strategy will enter a trade, typically, when the price goes above the support or resistance area that has been identified. Traders use a number of tactics to trade, and experience and study make these fruitful. You can learn more from ace broker Motilal Oswal as you embark on your trading journey. 

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