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Technical analysis guide

Breakout Trading

Big Idea: To most investors/traders, support and resistance levels are the number 1 most commonly used price action tool for gauging when to enter and exit trades. It is also one of the easiest indicators to see even without having to put much effort into spotting them on a chart.

Real Breakout Example

Image 1 shows an example of a real breakout. Price tests highs three times which makes it a strong resistance level. When price hits that level for the fourth time, it finally breaks above, and candles continue to push upwards shortly after. One thing that is important to look for is how the candle closes on that specific time frame. For a breakout to occur, the candle must usually break above and close above resistance. Otherwise, you could be looking at a false breakout.
Technical Analysis Guide- Real Breakout
Image 1: Real Breakout

False Breakout Example

Image 2 shows an example of a false breakout. Here, price tests resistance and breaks above. However, price cannot maintain itself at this level and comes back down leaving a long wick on the top of the candle. Price failed to close above the resistance zone even though it touched above it; that means price will have to make a second test to see whether or not it can really break out.
Technical Analysis Guide- Fake breakout
Image 2: False Breakout

Key Takeaways

A breakout is when price moves out of a channel with heavy volatility to the upside or downside.
A true breakout usually occurs when price rises above or below support or resistance and closes above/below.
A false breakout happens when price breaks above or below a certain level and cannot keep momentum in that direction.

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