Breakout is a term used in technical analysis that occurs when a security's price breaks through a specified level.
Breakout is a phenomenon in which a security's price spikes above a resistance level or plummets below a support level.
A breakout is confirmed when the close of the candle is above the resistance level or below the support level. If the candle's shadow is outside the resistance or support level but the price closes within this area, it has not been counted as a breakout.
Capturing the breakout point can bring huge profits for investors. However, in many cases, breakout points give false signals that make investors mistaken, thereby falling into buying at the top or selling at the bottom.
Not every breakout is successful, in other words, enough force to form a new trend. A false breakout is a phenomenon where the price breaks through a support or resistance area but then suddenly changes direction.
In order to identify a false breakout, investors need to pay attention first to the volume of transactions. An unsuccessful breakout usually has low volume, indicating that it is unlikely that the price will have enough strength to break out of support or resistance, but may turn around and continue moving in the old trend.
Besides, investors can use technical indicators to confirm price reversals and breakout points. RSI (Relative Strength Index) is a relative strength indicator capable of measuring price changes. Based on this indicator, investors can assess the overbought or oversold situation in the market, identify trend reversal.
In fact, there will be no method that can completely predict true or false breakouts. The use of other technical indicators will minimize the risk that investors may encounter.
For experienced investors, they will determine a profit target in advance, place a stop loss order to preserve capital if they make a wrong judgment and encounter a false breakout.
In addition to technical factors, investors should not ignore economic news as it can affect trading sentiment, helping to predict the trend of a breakout.
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