10 Tips to Getting Started With Technical Analysis

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Tip #9: Consolidations and Breakouts

Often, when investors are uncertain about a security's value, volume will wither and the trading range will narrow as traders move to the sidelines and wait for more information about the security's outlook. As soon as they get the data they need to make a move, they pile in, volume expands and the security sees a large jump in its price.

The time that was characterized by dwindling volume as investors waited is frequently called a consolidation, during which a security moves a lot less than analysts expect. Conversely, a breakout is the period immediately following a consolidation, when traders see the large price jump.

Statistically speaking, securities are in some stage of consolidation about 70% of the time and are making dramatic breakouts the other 30% of the time. Being able to indentify volume phenomena can help you to spot potential breakouts and protect yourself from consolidations.

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