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2024/05
Market confusion? Learn to identify breakout trends accurately!
It is well known that the breakout of trend lines has significant analytical significance in the trading process for choosing buy and sell timing. Therefore, investors must understand whether it is an effective breakout when trend lines are broken.
This article will provide methods for judging trend line breakouts and market principles. However, it is essential to remember to conduct specific analyses based on the current market situation before applying them.
1. The Breakout of Closing Prices is a Real Breakout
The breakout of closing prices above trend lines is effective and can be considered a signal for entry. Taking the descending trend line as an example, if the market price has breached the resistance line but the closing price remains below it, the market attempts to test higher levels.
Still, it encountered selling pressure, causing the price to fall back to a close. Such a breakout is ineffective, meaning the resistance line remains valid, and the market trend remains unchanged.
Similarly, one should observe whether the closing price falls below the trend line for the breakout of ascending trend lines. There are often situations in chart records where the price returns to its original position after a trend line breakout. This scenario is often a trap set by the market.
2. Principles for Judging Breakouts
To avoid timing errors in market entry, technical analysis experts have summarized several principles for judging true and false breakouts:
A. After identifying a breakout, observe for another day.
If the price continues to move toward the breakout for two consecutive days, it indicates a valid breakout and provides a prudent entry opportunity.
Of course, entering the market two days later means the price has changed significantly: the buying price is higher, and the selling price is lower.
However, as the direction is clear and the trend is established, investors can still participate, which is much better than entering the market rashly.
B. Pay attention to the high and low prices two days after the breakout.
Suppose the closing price breaks above a downward trend line (resistance line), and the trading price crosses the previous day’s high on the second day. In that case, it indicates significant buying interest following the breakout.
Conversely, if the price moves below the lowest price after breaking an upward trend line, it means substantial selling pressure following the breakout, warranting consideration for selling.
C. Consider trading volume.
Trading volume is typically a measure of market sentiment. For example, if the market price rises significantly and the trading volume also increases significantly, it indicates confidence in the direction of the stock price movement.
Conversely, if the market price surges but the trading volume decreases, it means fewer followers and market doubts about the direction of the movement.
The breakout of trend lines follows the same principle. Suppose the price breaks above a resistance line, and the trading volume increases or remains normal.
In that case, it indicates confidence in the direction of the price movement after the breakout, and investors can participate to gain substantial profits.
However, if the trading volume decreases after the breakout, caution is advised to prevent the price from returning to its original position.
D. Sideways movement
When studying trend line breakouts, it is necessary to mention a situation: breaking one trend does not necessarily mean the immediate start of a new trend in the opposite direction. Sometimes, due to a rapid ascent or descent, the market needs to adjust slightly and undergo a sideways movement.
If the range of the sideways movement is narrow, it forms what is called a bull hide state. Sideways movement can last for some time, sometimes for days or weeks before ending. Technical analysis experts refer to this as a digestion phase or consolidation phase.
