What Is a Breakout in Stocks? Tips for Buying Breakout Stocks
•By Siti Afizah Rincing
Artikel ini juga tersedia dalam Bahasa Melayu
Loading...
What is a breakout in stocks?
Before we dive deeper into understanding what a breakout is, let us first recap some basics about candlesticks, charts and support & resistance.
A candlestick is a type of price chart used in technical analysis that displays the high, low, open, and closing prices of a security for a specific period. Each candlestick provides traders with a visual representation of price movement, making it easier to identify market trends and patterns.
Candlesticks are formed based on four key price points within a given time frame: the opening price, closing price, highest price, and lowest price. The body of the candlestick represents the range between the open and close, while the wicks (or shadows) show the high and low extremes.
A bullish candlestick occurs when the closing price is higher than the opening price. It is usually displayed in green or white, indicating that buyers dominated the session and pushed the price upward. A long bullish body with minimal shadows shows strong buying pressure.
A bearish candlestick occurs when the closing price is lower than the opening price. It is typically displayed in red or black, signalling that sellers controlled the session. A long bearish body with minimal shadows indicates strong selling pressure.
A chart in stock trading is a graphical representation of a security's price movement over time. Charts are essential tools for technical analysis, helping traders and investors to visually identify trends, patterns, and key levels such as support and resistance. The most commonly used chart types are line charts, bar charts, and candlestick charts.
Support and resistance are fundamental concepts in technical analysis. Support is a price level where a stock tends to stop falling because demand (buying interest) increases. Resistance is a price level where a stock tends to stop rising because supply (selling interest) increases. These levels are identified by looking at historical price data and are crucial for planning entry and exit points in trading.
A breakout occurs when the price of a stock moves above a resistance level or below a support level with significant volume. This movement signals a potential continuation in the direction of the breakout, making it a key opportunity for traders to enter a position.
When a stock breaks through resistance, that former resistance level often becomes the new support level — a concept known as role reversal. This is important because it helps traders determine where to place their stop-loss orders.
Breakouts are significant because they indicate a shift in supply and demand dynamics. When a stock breaks through a well-established resistance with strong volume, it suggests that buyers have overwhelmed sellers, and the price is likely to continue rising.
Not all breakouts are genuine. Some are false breakouts where the price briefly moves past a level only to reverse quickly. Here are the key tips to help you identify a genuine breakout:
A Marubozu candlestick is a strong, full-bodied candlestick with little to no shadows (wicks). When you see a bullish Marubozu during a breakout, it indicates very strong buying pressure — the stock opened at its lowest and closed at its highest for that session. This is one of the most reliable confirmation signals for a genuine breakout.
Volume is one of the most critical factors in confirming a breakout. A genuine breakout is typically accompanied by trading volume that is significantly higher than the average. High volume shows that many market participants are behind the move, giving it more credibility. If a stock breaks resistance on low volume, it is more likely to be a false breakout.
A gap up occurs when a stock opens significantly higher than its previous closing price, leaving a visible gap on the chart. When a gap up occurs alongside a breakout above resistance, it provides additional confirmation that strong buying interest exists. Gap ups are especially powerful when combined with high volume and a strong candlestick pattern.
A breakout happens when a stock price moves past an important resistance or support level, accompanied by high volume. It indicates strong momentum and is often used as an entry signal by technical traders.
A real breakout is typically accompanied by volume significantly higher than the average, a strong candlestick (full body, minimal shadow), and a gap up. A false breakout, on the other hand, usually occurs on low volume and the price quickly drops back below the resistance level.
Support and resistance are key price levels that form the basis of a breakout. When the price successfully breaks through resistance with strength, the old resistance becomes the new support — this is called role reversal and it is important for determining your cut-loss level.
Yes, the breakout strategy is very suitable for stocks on Bursa Malaysia, particularly counters with high trading volume. Make sure you check the daily chart, identify the resistance level, and wait for volume confirmation before entering a position.
Understanding the concept of breakout is an important step in improving your trading skills — combine it with candlestick and volume knowledge for more accurate entry decisions.
Download our free investment basics ebook to learn the fundamentals of stock investing from scratch.
Ready to start trading? Open a CDS account to begin buying stocks on Bursa Malaysia.