Much like reversal patterns,the function of breakout patterns is to identify the entry point on a stock which is about to make a sharp upward price change. In contrast to reversal patterns, the breakout pattern is not meant to identify the point of reversal, but its continuation.
Breakout patterns operate better when the market is stronger and volume is high. It is possible to trade in breakout patterns throughout the trading day, but the best time to do so is during the first ninety minutes of the trading session. Later, we will trade in intraday breakouts, providing they look particularly good or are based on the daily chart, and their purpose is for a swing of several days’ length.
Breakdown – The Breakout’s Reverse
The reverse of breakout patterns is known as breakdown patterns. Everything that has been said relative to stocks breaking out with an upward movement is true for stocks breaking down in a downward movement.
Breakout and breakdown patterns are based on psychological formations of buyers and sellers. In short, their based on fear and on greed. Every time you identify a pattern, imagine the people currently holding the stock, or about to exit it. Think about the mindset of long traders, short traders, and the disappointment of those who did not succeed in buying or shorting, or those who are currently, like you, trying to enter. By the time you reach the stage where you “understand” the stock, the patterns will be well assimilated in your mind.
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