<p>Breakdown is a technical term in trading, specifically in the context of Forex and CFD markets, referring to a price movement where it falls below a previously established <a href="/NewSite/encyclopedia/support/" class="ency-link">support level</a>. This support level is typically identified through historical price data and acts as a price floor, indicating where demand is strong enough to prevent the price from falling further.</p>

<h2>How It Works</h2>
<p>When a breakdown occurs, it signals a shift in market dynamics, often indicating a change from a bullish to a bearish trend. Here's how it works:</p>
<ul>
  <li>Identify the support level. This could be a previous low point, a Fibonacci retracement level, or a round number.</li>
  <li>Monitor the price action around this level. If the price falls below this support level and closes below it, a breakdown is confirmed.</li>
  <li>After a breakdown, the previous support level often becomes a new resistance level, as the market now expects the price to struggle to rise above this point.</li>
</ul>

<h2>Why It Matters</h2>
<p>Understanding and identifying breakdowns is crucial for traders for several reasons:</p>
<ul>
  <li><strong>Risk Management</strong>: Breakdowns can help traders identify when to exit long positions or enter short positions to potentially profit from a price decline.</li>
  <li><strong>Trend Identification</strong>: Breakdowns can signal a change in trend, allowing traders to align their positions with the prevailing market direction.</li>
  <li><strong>Entry and Exit Points</strong>: Breakdowns can provide clear entry points for short positions and exit points for long positions, helping traders make more informed decisions.</li>
</ul>