When the price moves decisively below a support level or a chart pattern boundary, signaling potential continuation downward with increased selling pressure.
What Is a Breakdown?
A breakdown is the bearish equivalent of a Breakout. It occurs when the price falls below a Support level, the lower boundary of a chart pattern, or a Consolidation range. The move signals that sellers have overwhelmed the buying pressure at that level, pushing price into lower territory.
Trading Breakdowns
On USD/JPY, if a support level at 148.00 that has held three times finally gives way, that is a breakdown. Enter short when a candle closes decisively below the level. Place a stop above the broken support (now Resistance). Target the next support zone below.
Like breakouts, not all breakdowns sustain. The price may dip below support briefly and then recover, trapping short sellers. This is called a Fakeout or a bear trap.
Confirming a Breakdown
Several factors increase the reliability of a breakdown: a strong bearish candle close (full body below the level, not just a wick), expanding volume on the break, and the breakdown occurring in the direction of the higher-timeframe Downtrend.
Waiting for a retest of the broken support from below can improve entry quality. If the price pulls back to the broken support level and gets rejected (forming a bearish candle like a Shooting Star), enter short at that point with a tighter stop and better risk-reward ratio.
Related Terms
Breakout
When the price moves decisively above a resistance level or a chart pattern boundary, signaling potential continuation in the breakout direction with increased momentum.
Fakeout
A false breakout or breakdown where the price briefly moves beyond a key level but quickly reverses back, trapping traders who entered on the initial move.
Support
A price level where buying interest is strong enough to prevent further decline. The price tends to bounce upward when it reaches support.
Resistance
A price level where selling interest is strong enough to prevent further advance. The price tends to reverse downward when it reaches resistance.
Ready to trade live?
XTB. Our pick for technical analysis. The xStation 5 platform with advanced charting, $0 minimum deposit, FCA and KNF regulated.
71% of retail CFD accounts lose money when trading with this provider.