Why does the market break out of certain areas on the chart, and how can use these breakout trades? In this video, we analyze how to spot these levels of R&S and how to trade off of them.
High volume trade spikes happen when the market breaks levels of re enforced support and resistance. Active position stop loss levels trigger at this point causing a snowball effect. When you are trading these levels, be mindful of how quickly the market can move. These levels do act as barriers for the market to break, but when they are broken the market can run quickly. This is because they hold not only people who want to trade that direction in the market, but the people with stop losses in place. This causes a two fold increase in buying/selling.
Why watch out for these Breakout Trades?
These areas on the market cause unforeseen losses and slippage to new traders. Even if a trader has a stop loss level in place, they can still experience slippage with targets. Know that the market is building up for a quick move in one direction when this setup happens.
When the market is making a push down to break a ongoing trend, like we see in the video, this can be one of the key bear signals that you have to pay attention to before you enter a long trade. As we can see the bear signals happening on day 6 of this trade that make it less then opportune to enter.
The buildup before the Breakout Trade:
Traders start to pile onto a market as it goes in one direction. As the first traders started who got in on the position early get well within their profit targets, they become more and more hesitant. They are protecting their profits by keeping stop losses close to the market. We see a clear example of this in the image below. The initial traders are happy, and ready to exit the trade for a profit, and this combination of stop losses, and traders wanting to reverse the market direction ends with a high volume spike.