Breakout and breakdown are both distinct aspects of technical analysis that help a trader develop a suitable strategy in the stock market.
A breakout refers to a stock movement that allows investors and analysts to determine whether a security price will move higher or lower after breaching resistance and support levels.
A breakout as a term is often used to highlight the point at which the price of an asset moves above a level of resistance (in an uptrend) or below a level of support (in a downtrend), underscoring a potential change in the direction of the trend.
In case a breakout occurs in the opposite direction of a prior trend, the trend is likely reversing, and a position should be closed and may be reversed. On the other hand, in case a breakout occurs in the direction of a previous trend, the trend is likely still there and is likely to be continued.
A breakout above a resistance level highlights that bullish sentiment is on the rise and that buyers remain in control, potentially leading to a sustained uptrend.
Similarly, a breakout below a support level highlights that bearish sentiment is on the rise and that sellers are in control, potentially leading to a sustained downtrend.
Generally, analysing a breakout is suitable for intraday trading and at times of market volatility in which there are large up-and-down movements over a period in futures and spot price markets on assets.
The term could be related to assets or securities, including stocks, bonds, foreign exchange, commodities, and cryptocurrency.
Similar to the upside trend in the market, which highlights a breakout, a breakdown is usually when the price of a stock breaks the support levels with huge volume growth in trading.
Generally, breakdown indicates a bearish signal, and traders consider it for the sort of selling or exiting from the long positions they held in stocks or any other securities such as commodities, cryptocurrency and currency trading in the financial markets.
Both breakout and breakdown are two crucial signals in technical analysis, which traders widely use to formulate suitable trading strategies in the stock market.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.