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A breakout indicates when the price of an asset moves above a resistance area or moves below a support area. Breakouts indicate the potential for prices to start trending toward a breakout. For example, an upward breakout from a chart pattern may indicate that the price is starting to rise. Breakouts that occur on high volume (compared to normal volume) show more conviction, meaning the price is more likely to move in that direction.
A breakout occurs because the price has been potentially below a resistance level or above a support level for some time. The resistance or support level becomes the line in the sand that many traders use to set entry points or stop loss levels. When the price breaks through a support or resistance level, traders waiting for a breakout jump in, and those who did not want the price to break out exit their positions to avoid more losses.
This flurry of activity will often cause a surge in volume, indicating that many traders were interested in the breakout level. Higher than average volume helps confirm a leak. If there is little volume on the breakout, the level may not have been significant to many traders, or not enough traders have yet felt doomed to place a trade near the level. These low-volume leaks are more likely to fail. In case of a breakout to the upside, if it fails, the price will drop back below the resistance. In the event of a breakout to the downside, often called a breakout, if it fails, the price will move back above the support level it broke below.
Breakouts are commonly associated with ranges or other crypto chart patterns, including triangles, flags, wedges, and shoulders and heads. These patterns are formed when the price moves in a specific way, leading to well-defined support and/or resistance levels. Traders then watch these levels for leaks. They can initiate long positions or exit short positions if the price breaks resistance, or they can initiate short positions or exit long positions if the price breaks below support.
Even after a high volume breakout, the price will often (but not always) return to the breakout point before moving back toward the breakout. This is because short-term traders will often buy the initial breakout, but then try to sell fairly quickly for a profit. This selling will temporarily drive the price back to the breakeven point. If the breakout is legitimate (not a failure), then the price should move back in the direction of the breakout. If not, it’s a failed escape.
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