In chart analysis, the term blowoff or blow-off denotes a rapid spike in the price of a traded product after a long spell of more gradual increases which is followed closely by a sharp decrease.
A blowoff typically occurs when demand for a stock peaks, and are normally caused by small investors rushing to buy an investment which has shown a steady value increase (see also: Dienstmädchenbörse). The demand caused by the rush to buy a high-performance investment leads to a drastic increase in its market value, although the intrinsic value of the company, commodity or service it represents remains the same or only grows marginally.
Once the investment’s value has been driven up by small investors, the early investors (typically institutional investors) who first drove up the investment’s value take advantage of the high market price and sell their investments. This increases supply, which lowers the value of the investment. As the rate dips, small investors rush to sell their investments at a profit or the lowest possible loss. This drastically increases supply, causing the value of the investment to plummet.
Blowoffs can be profitable for investors who short sell investments just before they peak (or just after they peak in the case of highly liquid shares which will still find buyers during a decline).
By analyzing past blowoffs, chart analysts aim to predict which investments are likely to experience blowoffs and thus find the ideal point at which to buy, sell or short investments.
Traders can use trailing stop orders to minimize losses in the event of blowoffs.
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