Stock trading: resistance and breakouts

Stock trading: resistance and breakouts

Breakout strategy is one of the most profitable and valid strategies being actively pursued by the investors in the stock trading today. This strategy is basically the starting point of many major price moves in the stock market and if managed properly by the trader can offer number of benefits, limited downside risk being on the top of this list. A breakout basically refers to a stock price that moves outside a support or resistance level where support and resistance both represent key junctures where the forces of demand and supply meet. In simple terms, support is said to be that price level at which demand is thought to be strong enough to prevent further price decline of the stock whereas resistance indicates a price level at which selling is thought to be strong enough to prevent any further price rise.
So, a trader following a breakout strategy enters into a long position when the stock price rises above the resistance level i.e. as and when the price of the stock is expected to rise any further, thereby creating profitable avenues for the investor. On the other hand, a breakout trader would enter into a short position when the price of the stock falls below the support. As and when the stock starts trending over and above the pre-determined price barriers, the volatility tends to increase in such a manner that prices of the stock begin to trend in the breakouts direction. Breakout trading is surely one of the most important trading strategies in the present times as it prepares a foundation for future volatility and major price swings.
Breakout strategies are generally the most ideal strategies to be considered when the stock market is having a bullish phase i.e. the when the stock prices are going up. These strategies help in generating huge profits during the bullish period and one must include them in their trading systems in order to take its advantage. Undoubtedly, breakouts work best in a bullish environment but one simply cannot undermine its usefulness in the bearish times. Yes, breakouts strategy works well in bearish environment and uses support as the base for price breakdown. The breakdown strategy in the bearish period is commonly referred to as breakdown stock trading strategy.
In order to generate realistic profits, a trader must have the ability to differentiate between a breakout and a fake out and if he doesn’t possess the requisite knowledge to determine the same then, we suggest him to wait for a confirmation from the market itself. For instance, a break out occurs when prices of stocks open beyond support/resistance levels but tend to move up to their original place within a single day trade. The investor who tends to jump quickly onto the day trading without any confirmations is bound to suffer a major setback in the form of a debit entry to his Profit and loss account in the name of loss on investment. So, wait till the point where either the prices tend to sustain or a reliable confirmation from the market is received before pursuing a breakout strategy.