Breakdown

What Is a Breakdown?

A breakdown is a downward move in a security's price, as a rule through a recognized level of support, that predicts further declines. A breakdown usually happens on heavy volume and the subsequent move lower will in general be quick in duration and extreme in greatness.

Grasping a Breakdown

A breakdown can be distinguished by traders utilizing technical instruments like moving averages, trendlines and chart patterns. Traders can draw trendlines on a chart that interface several swing lows to find areas where prices might defenseless to break down. Heavy volume ought to go with a breakdown below key support levels, which shows cooperation in the move lower.

Technical traders can either close out any existing long positions or short sell a security when it breaks below a support level, since that is an obvious sign that the bears are in control and that extra selling pressure is probably going to follow. A breakdown frequently flags the beginning of a downtrend.

At the point when a security initially breaks down, traders ought to look for confirmation from several indicators and other chart time periods to guarantee the move isn't a head-fake. For instance, a breakdown on a 15-minute chart has a higher likelihood of continuing lower in the event that the daily and week after week charts are in a downtrend. A breakdown is the bearish partner of a breakout. In the chart below, prices have broken down below the neckline of a head and shoulders pattern.

Antagonist traders might hope to trade failed breakdowns.

Trading a Breakdown

Traders could take a short position when the security's price initially breaks down below major support. To do this, a sell stop-limit order would should be placed just below the support level. When prices break down, the decline is probably going to be strengthened as stop-loss orders for long positions are set off with extra selling pressure coming from breakdown traders. The extra volatility brought about by the breakdown might bring about a fair fill, due to slippage.

On the other hand, traders can trust that a retracement will enter the market. They could place a limit order where the security's price initially separated from; that area has now turned into a resistance level. Entering the market on a retracement is probably going to bring about a better fill than trying to early catch the breakdown. The flip side is the security may not follow back to the trader's limit price.

Once in a short position, traders could utilize a trend following indicator, for example, a moving average as a trailing stop. For instance, when the price of the security closes over the moving average, the trade is left. In the event that traders accept the breakdown is the beginning of a new downtrend, they might need to utilize a longer-term moving average to try and catch the majority of the move.

Features

• A breakdown can be recognized by traders utilizing technical instruments like moving averages, trendlines, and chart patterns.
• A breakdown generally happens on heavy volume and the subsequent move lower will in general be quick in duration and serious in greatness.
• A breakdown is a downward move in a security's price, as a rule through a recognized level of support, that forecasts further declines.