Basics of Breakout Trading

                       

I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times. Bruce Lee

I feel this is also true for trading, as for a successful trader you needs only one setup or strategy. The set-up you choose or design for trading is quite critical for your success as sometime setup doesn’t gives you enough trade signal or some doesn’t have good risk reward or too difficult to trade and understand. To overcome all this one good and clean strategy is Breakout trading. Breakout trading is quite simple and you can trade in all market with minimal amount of risk and good profit potential.

Nicholas Darvas, was trading legend, the author of “How I Made $2,000,000 in the Stock Market”, says: “My only sound reason for buying a stock is that it is rising in price. If that is happening, no other reason is required. If that is not happening, no other reason is worth considering.”

In simple words breakout trading is nothing special but an attempt to enter the market when the price moves outside a defined price range (support or resistance). However, a genuine breakout needs to be accompanied by increased volume. You can’t make good money in trading while market is sideways.

In order to understand breakout trading, it is important to remember two types of breakouts. Most common identified two types of breakout trading setups are:

·       Support and Resistance breakouts

https://www.investopedia.com/trading/support-and-resistance-basics/

 

·       Swing high and Swing Low breakouts

https://www.investopedia.com/terms/s/swinghigh.asp

https://www.investopedia.com/terms/s/swinglow.asp

 

Breakout trading is under rated now a days because there are so many fancy looking strategy available in the market. Many popular writers says ‘’ wait for pullback ‘’ or ‘’ most breakout fails in first attempt’’. The problem is that many strong moves doesn’t gives pullback or they are so late that risk reward doesn’t looks in favour in that point.

So the most important skill required for breakout trader is ‘’understanding the market phase’’. This refers to being able to recognize whether the market is trending or not. Most of retail new young trader will say that ‘’ I know that ‘’ but still they lose money consistently and will go away from market eventually. It’s because they don’t have well defined method for determining market phase and if few does they don’t stick to plan (Sometime I also lose trade because of this). Let’s consider the following chart 

 Please click on the charts to view them in full resolution.


In this chart price was consolidating within box 1 and above MA channel but once price broke below box and channel it was moving down swiftly with few more short entry opportunity when it reaches near MA channel. Similar after down move from Box 1 some consolidation in Box 2 and fresh break down. 



Box 3 tested its support and resistance multiple times then breaks upside and price was above MA channel and we got good upside. Box 4 is also gave handsome amount of profit. Next chart is continuation of above.


 

Here we may use 20 MA High Low channel for trailing SL purpose. If it closes above or below of channel in opposite direction, we will close the position and wait for new trade as showing in above picture. In this case you might have more no of trade but limit your risk. 

Note: In all the trades there was no pullback so as a trader there is nothing more frustrating than waiting for trade and miss the opportunity. Although in the following Nifty-50 chart all trades have pullback


                             How to trade this whole setup

Entry: We enter in trade once it gives a strong close outside of a price rectangle. Most important point to look out for this trade is the characteristic of the candle. Candle must have a strong close and volume should be more than average.

In the following chart of Asian Paint we can see that once it breaks the channel with nice candle and volume it keep moving higher.


The greatest of breakout trading is that you get in start of trend at great price and hold the trade for large profit.

Stop Loss: Sometimes, the market gives breakout or penetrate a few ticks and enter back into range. So, it’s always compulsory to have a stop loss in system. Stop loss may depends on person risk but a 10-15% inside the range could be a good stop loss so you not shaken out and also get taken out when trend failed. 


                                          

Profit Booking: The most difficult problem after putting SL in trading is: where do we take profit..?

Good breakout usually have quite big move and most of the time trader can’t even imagine or anticipate. So one option is if you have more than 1 quantity book some at double of your risk. Example if you have SL of 15 points book partial once your trade in profit of 30 points. Consider the same Asian Paint 5 min chart we may not expected such move while in HUL SL got hit twice first long then short.

This is also good strategy for investment following examples



 

 

 

How to improve success rate for this setup: It is quite common saying for trading that follow the trend for good profit. In other words, look at the market you are trading on a higher timeframe. If you trade 5 minutes, look at a day chart. If you trade 30 minute charts, look at a daily & week chart.

We combine this with the strategies discussed in the pdf ‘’ Summary of Candlesticks, Fibonacci, and Chart Pattern Trading Tools A Synergistic Strategy to Enhance Profits and Reduce Risk (Wiley Trading) by Robert Fischer, Jens Fischer ’’ we can get more better results as then we are combining multiple signal for same trade.

 

What to avoid in Breakout trading: There are few special point that you need to avoid if you are breakout trader

·       Choose setup properly with favourable risk reward

·       Mismanage the position once you entered in trade

 

 

                       SOME FINAL REMARKS

 

To have absolute return in a portfolio, the trading concept must implement some basic ideas:

·        A systematic trading approach tested on historical data either with a computer or by hand.

·       Five to ten products in a portfolio, analysed by the same approach (a few products less might be sufficient on intraday portfolios).

·       Long and short signals allowed.

·       Stop-loss protection, profit targets, and/or trailing stops on every position.

 

No matter how good a trading approach is, a trader who does not know how to execute it will never be successful. Some factors that can lead to bad decisions in trading even though they have nothing to do with the trading strategy itself:

·       Put your ego aside.

·       Hoping and praying do not help.

·       Living with losses must be learned.

·       Never double your losses.

·       Know your pain level.

·       Diversify risk.

·       Making money with trading is hard work.

·       Recognize the importance of a trading plan.

·       Nothing is more important than discipline.

 

I am sorry if its unorganised, typos or not good to read. For your valuable comment please feel free to write me on twitter (@bishwesvar).

 ( This is a guest post by Bishwesvar Pratap Singh )

         Suggestions are welcome for future work & motivation

 

Comments

  1. Wonderful article, thanks for this beautiful strategies

    ReplyDelete
  2. Beautifully explained sir... Thank you so much for sharing

    ReplyDelete
  3. Great . Thank you for the information.

    ReplyDelete
  4. Thanks for the feedback guys ...

    ReplyDelete
  5. Very good article, explained in detail entry points, SL, profit booking with examples. I read it multiples times and there is knowledge in each and every line. thanks a lot. Just one questions, if you could exlpain how form boxes it will be really great. I understand that it should be using resistance and support but more details about it will really help.

    ReplyDelete
  6. can you please explain what is strong close " Candle must have a strong close"

    ReplyDelete
  7. Nice post. Very knowledgeable. Thanks to Mr. Bishwesvar :)

    ReplyDelete

Post a Comment