We use cookies to run essential site features, understand how visitors use AutoEdges, and — if you allow it — show relevant ads. See our Cookie Policy for details.
Price action is the practice of making trading decisions directly from how price is moving -- candle by candle, swing by swing -- rather than from indicators calculated off of it. A breakout, a pullback, and a reversal are three of the most basic price-action events, and telling them apart is one of the first real skills built on top of the candlestick and support/resistance basics from earlier in this module.
A breakout happens when price pushes cleanly through a level that had previously held, like a resistance level it had bounced off of more than once. A genuine breakout is usually accompanied by a strong, decisive candle through the level rather than a hesitant one, and often (though not always) by higher volume, as covered in Module 6 -- both are signs that real conviction is behind the move rather than a brief, thin poke through the level that quickly fails.
A pullback is a short, temporary move against the dominant trend, before that trend resumes -- price pausing to breathe rather than reversing. In an uptrend, a pullback pulls price down toward a moving average or a prior support level without breaking the broader pattern of higher highs and higher lows; traders often watch for pullbacks as lower-risk entry points to join an already-established trend, rather than chasing price at a fresh high.
A reversal is different from both: it's a genuine change in the dominant direction, not a pause within it. Reversals are usually confirmed by a break in market structure -- an uptrend that was making higher highs and higher lows suddenly makes a lower low, the market-structure signal covered earlier in this module -- rather than by a single sharp candle, since a sharp candle alone can just as easily turn out to be the start of a pullback that resumes the original trend. Reading price action well is largely about not confusing these three -- treating a pullback as a reversal (and exiting a good trend too early) or a pullback as a breakout (and entering before the level is genuinely broken) are two of the most common price-action misreads beginners make.
Real-World Example
A stock breaks decisively above a resistance level on a strong candle and rising volume, a genuine breakout. Days later it pulls back partway toward that broken level, a normal pullback that doesn't undo the higher highs and higher lows pattern, before resuming higher, rewarding traders who bought the pullback rather than chasing the initial breakout. Weeks after that, the stock finally makes a lower high and breaks its prior higher low, a reversal, ending the uptrend altogether, three distinct price-action events, each requiring a different read on the same chart.
This lesson is free — no purchase needed to keep learning.