What Is Breakout In Trading?
A breakout refers to a price of an asset that breaks beyond a key support or a resistance level, which usually leads to huge price movements.
For example, we can place a resistance level above and a support level below if the price moves within a range.
Price as rejected multiple times towards the resistance and support levels.
Now notice that as soon as the price broke out at the key level, the market started trending; this would have been a good entry.
There are two types of strategies for positive breakout stocks,
Suppose the market has been consolidating for some and rejected many times by touching the same resistance level.
If the price key level has broken the resistance zone towards the buying side, it would be a good buying entry after the next opening.
Remember one thing: one should give an entry after the breakout candle closes above the rejected resistance, and the next candle should be open above the resistance zone.
Suppose the market has been consolidating for some and rejected many times by touching the same support level.
If the price key level has broken the support zone towards the selling side, it would be a good selling entry after the next opening.
Remember one thing: one should give an entry after the breakout candle closes below the rejected support and the next candle should be open below the support zone.
Positive Breakout stocks
If the volume had increased higher than the normal levels, it is called a breakout.
Many traders will trade when the breakout is towards the bullish side.
But when a breakout happens on the bearish side, the movement of the stock will be huge in most cases.
Positivity means not only the breakout towards the bullish side but also the breakout towards the bearish side
There will be only one process for all breakout patterns, but the time frame should differ.
For daily positive breakout stocks, the time frame has to be the daily time frame
For weekly positive breakout stocks, the time frame has to be the weekly time frame
For monthly positive breakout stocks, the time frame has to be the monthly time frame
Selection of stocks For daily, weekly, and monthly breakouts.
How To Identify Positive Breakout Stocks For Tomorrow?
I am not here to update the breakout stocks day by day; you have to find which stocks are giving breakout among your selected stocks.
Blue chips stocks are the best ones for trading in any time frame
Always trade large-cap stocks, and trade a limited number of stocks
your stocks should be counted at your fingers
Stocks Should be under the category of nifty 50 and nifty bank scrips
After the market opening, you have to check for these breakout patterns among your selected stocks.
If you find these patterns approximately, you can place entry
Do not wait for the patterns in the exact design; you will not get even one trade.
In my point of view, a breakout towards the bullish and bearish side is a positive breakout.
When the stock breaks towards the bearish side, I do not consider it as a negative breakout; for me, it is also a positive breakout because we can make profits towards the bearish also
Patterns For Daily Breakout Stocks
By mastering these patterns, you can easily identify which stock is ready for a breakout
There is a simple way to do that by looking out the positive breakout stocks patterns.
I am sure that most of these patterns you have seen before.
Patterns like Rectangle, pennant, wedge, triangle, flag, all such types of ways for trading in breakout trading stocks
When looking at this pattern list, traders make a common mistake because they wait for the market to make the same movements as the drawings.
For example, they look at the wedge pattern, and they will try to find candles that move the same as this.
If you are still doing this, I can guarantee that you will never spot a single pattern because the truth is that prices don’t move like this in real life.
So instead, what you want to focus on, is to find the key levels.
For example, as we look at this chart, we can see that the price is forming lower highs, which means we can draw a downward straight line above it because there are multiple rejections.
As we look below the chart, we saw more rejections, and so we draw a support line below here; now, if you look closely, we just found a triangle pattern because we have the same key levels, a downward trend line, and a support line.
So this concept applies to other patterns as well.
If you spot a support and resistance level, and then it’s a rectangle pattern.
If you spot two opposite trend lines, it’s a pennant.
If you find two trend lines heading in the same direction, it’s a flag pattern.
By knowing this key concept, you don’t need to memorize the name of patterns; it doesn’t matter if it is a triangle, a wedge, or Rectangle; at the end of the day, all of them are on one concept.
- Price consolidations
- Forms key levels
As long as you would find these key levels, our strategy would work more accurately.
Once you identify this consolidation pattern, the next step is predicting the direction of the breakout, and it will happen to the upside or the downside.
The traders’ common mistake is that they immediately take a position at the first breakout that they see.
For example, here we spotted both a level of support and resistance, which means it is a rectangle pattern, so next, we can see the candle closes slightly above the upper level, now traders will think, this is the breakout, and movement will happen to the upside, and they will make an entry.
They will lose money because the breakout will not happen, and the price is in the consolidation range.
How to Avoid False Breakouts While Trading In positive breakout stocks ?
While I use it to avoid false breakout trading, a simple trick is to identify the momentum candles at the time of breaking.
A momentum candle could be in the form of a big candle or multiple medium-sized candles.
For example, in this chart, we can see the price is forming lower highs, which means we can draw a downwards trend line above here, and below it, we spotted higher lows, so we draw an upper trend line.
It is a pennants pattern.
When the big green candle broke the upper trend line by a small part, as shown in the picture, do not enter the trade blindly and lose money.
Wait for the next candle to form; if it is the big or medium momentum candle, you can make an entry trade.
But unfortunately, it was the red candle that formed instead, so we ignore this trade and wait for the momentum green candle to form.
The following three scenarios will occur after the momentum candle has formed.
The price continues to trend upwards
price makes a pullback towards the key level before continuing upwards.
The price reverses downwards, and that is considered a false breakout.
How to Avoid the above scenarios?
Instead of predicting what will happen next, I am positioning myself to have the edge, no matter what happens.
What I do is, I will enter the buying position at the momentum candle close.
I will adjust my position based on the risk-reward ratio in the for positive breakout stocks.
I will set my stop-loss slightly below the upper trend line to benefit from every scenario.
If the first scenario happens, that means the price continued upwards, and I will end up being profitable.
If the second scenario happens, if the price pullbacks towards the key level before continuing upwards, the stop loss would not be hit, I will still end up in profits.
Unfortunately, if the third scenario happens, it is a false breakout; my stop loss will get hit, preventing me from losing more money.
You have to look for the price action patterns before a positive breakout stocks.
Types of price action patterns are wedges, triangles, price action combining patterns with candlestick patterns.
My favorite patterns for positive breakout stocks are,
- Double top or double bottom pattern
Double Top Pattern For Positive breakout stocks.
What does double top give the signal for positive breakout stocks
This double top strategy will be applicable in the uptrend.
The double top pattern is a reversal pattern.
It shows a loss of momentum from the buyers, and it is the signal for you to go against the dominant trend.
Don’t chase trades because, as you can see, there is always another opportunity and another entry.
Vice versa, in a downtrend, the double bottom pattern will be applicable.
Look for a price action reversal pattern inside of the weekly double bottom.
How To Identify Trend Change Patterns You Look For These Traits Specifically?
- You have to look for a lower high or a lower low to occur right before a trend line break in an uptrend.
- In the downtrend, you have to look for a higher high to happen right before a trend line break.
How To Maintain The Quality Of The Trades For Positive Breakout Stocks?
The more concepts and strategies you learn, the more will your trade quality.
The deeper you get into the price action, the more you will understand the quality of the trade.
You should know when to take trade and when to pass on without making an entry.
All you will gain from your experience and practice.
What Is The Target?
Target should be according to your risk to reward ratio.
I would suggest trailing stop loss because breakouts will occur in a huge range in breakout trading.
For example, if I had made an entry with two lots, if the stock has moved up to the 1:1 ratio, I will close one lot position, I will ride the trade with one lot up to 1:2, and I will shift my stop loss up to my entry price.
Risk management is important in breakout trading.
All the above cases discussed are all probabilities; there are no sure shot points in the stock market.
I may confidently say that if you follow the above rules, you can get the most accurate trade-in breakout stocks.
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