Breakout Trading System

By | April 8, 2011

Breakout Trading System/Breakout Trading Strategy

What Is a Breakout?

A breakout is a stock price that moves outside a defined support or resistance level with increased volume. A breakout trader enters a long position after the stock price breaks above resistance or enters a short position after the stock breaks below support. Once the stock trades beyond the price barrier, volatility tends to increase and prices usually trend in the breakout’s direction.

In Stock Market terms a Breakout in a index/Stock Signify moves outside a definite resistance/Support Levels on an increased volume. It’s like a Stock is respecting a particular support and resistance for a period of time and forms a trading range but when there is increase in volume we can see the range breaking on either above resistance level or on support levels.

Once a Breakout happens we may see large swings coming in index/Stock prices with an increased in volatility.

Breakouts are generally classified as a starting of a major trend which may either be bullish or bearish depending on whether support is taken out or resistance.

Types of Breakout

Breakouts can be result of channel breakouts and price pattern breakouts such as triangles, flags or head and shoulders patterns.

Breakout trading system can be used for

  • Day trading,
  • Swing trading
  • Positional Trading

How to enter a Breakout trade

To enter a Breakout trade we need to find a particular stock which has been respecting a particular resistance/support for at least 3 times in the time frame you are seeing charts. Time frame can be intra day,weekly,Daily.

Once you have identified the stock you need to wait for price to close above a resistance level, to establish a bullish position and when prices are set to close below a support level, bearish position can be taken.

To determine the difference between a breakout and a “fake out” following Rules shall be useful.

  • “Two bar” Close Rule – Don’t take a breakout trade unless the market can sustain TWO closes (two days) above the breakout level.

  • 2% Threshold Rule  ­­– Take position after prices have closed 2% below a breakout zone

That may seem like a lot, but that’s the price you pay for safety in a breakout trade set-up.

Booking Profits depends on Traders/Investor Risk Profile So i will not comment on Booking Profit but would say Keep trailing your Stoploss.

Examples

Hanung Toys– Successful Breakout

As can be seen in charts  After Breakout Stock almost doubled and it satisfied all our rules

Fake Breakout–United Phosphorus Fizzles Out

Potential Candidate for Break Out Trade — Opto Circuits Keep on ur Radar

Opto Circuit is facing resistance at 237 and has not been able to cross it with volumes we can do a short term trade above 237+2% ie around 241 we can initiate longs keeping sl of 237 tgt of 247 which is previous high.

7 thoughts on “Breakout Trading System

  1. parminder

    Thanks bramesh for ur nice post regarding breakout strategy.

  2. Bramesh Post author

    Thanks Hesh.Do let me know any improvement required.

    Rgds,
    Bramesh

  3. hesh

    Like me who r learning technical analysis it’s really nice examples.

    He$H. . .

  4. lalit

    :mrgreen: fantastic post n examples given by u sir to explain in just simple words.great post.best learning site.

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