How to analyse and predict a price breakout
The first thing a trader turns to when learning about a stock is a chart of its prices. It helps trace the minimum and maximum zones or support and resistance levels. In addition, the trader can see the price breakout in one direction.
Price levels are formed based on the transactions made with the asset. This makes it possible to determine the asset’s true value that buyers are willing to pay. It is best to look at this process using a specific example:
– over a long period of time, the value of a share does not exceed USD 150-200;
– the market perceives the value of USD 150 as a cheap price, and buying increases;
– when the price reaches USD 200, traders identify the stock as “overheated”, and sales increase.
Eventually, however, the price exceeds USD 200 and continues to rise every day. This dynamic indicates that demand for the stock is outstripping supply. This situation is known as a price breakout. This suggests that the real value of security has changed.
Exceeding the established limits always attracts the interest of investors and speculators. Reaching a new price level is a sign of increasing long positions. Players should consider selling the asset when the price falls below the support zone. In other words, the strategy should be buying on the break of resistance and selling on the break of support. However, this strategy is not always correct. When working with breakouts, it is important to consider several characteristics:
1. False breakouts. In this case, prices rise above the highs but quickly fall back to the initial level.
2. A sharp rise often ends in a pullback. Sometimes prices rise, but more often, they return to the previous level. Accordingly, the latter is now considered a new support point.
3. A strong ceiling is difficult to break the first time. The price usually breaks through the level and returns to the previous level. After some time, the situation repeats itself until the ceiling is finally broken.
In addition to the marked points, it is essential to observe the market dynamics as a whole.
How to predict the breakout
Various indicators can indicate the probability of a price change. However, there is no guaranteed way to predict the start of the breakout and its authenticity 100%. Therefore, a trader must be able to analyse and compare a variety of market signals.
When using this strategy, it is crucial to monitor the trading volume. The breakout probability is minimal if the value falls to the support level with decreasing volume. In this case, it may also be wrong. A similar conclusion is possible when the price approaches the ceiling. Increasing volume when the value moves up indicates the possibility of a breakout when bullish sentiment dominates.
