How to Trade Breakouts/Breakout Failures
What the market does after the breakout/breakdown is important for trading it. I find following 4 scenarios to be common, I am taking example of the Pivot High breakout :
1) After the breakout the bar closes strongly above the pivot high.....and in subsequent bars continue going up.....this is is clear successful breakout....trade from the long side.
2) After the breakout , the bar closes strong and then the market goes a bit sideways, and continues in the direction of the breakout without closing in the range / below the body high of the Pivot high it broke....then again the breakout is successful...trade from long side.
3) After the breakout the bar closes above the Pivot High...and the next 1-2 bars show that the market is struggling to go up....it makes doji, small bars, long upper tail inverted hammers.....but still closing above the body high of the pivot it broke......then market is unable to go up and the bears get into the action. The bar closes below the body high....short the low of that bar. Your stoploss should be at the swing high......or if trading too aggressively, the high of the bar which closed below the body high.
4) The breakout bar unable to hold and the price retracts and closes below
the body high of the pivot bar......it is failure and short the low of this bar with stoploss at swing or new pivot high.
This gives early entry in the reversal move with small stoploss giving a very good Reward to Risk ratio.
The volumes give good clues....observe the volumes on each of the bar in various scenarios and you will find that the volume supports our market analysis and views.On breakout bars volume increases....on next 2-3 small bars low volumes and on rejection bars we get high volumes again.
Every breakout is considered to be a valid breakout unless it proves otherwise. So on breakout, you have to trade in the direction of the breakout and buy above the pivot high or high of consolidation. The market generally moves very fast after the breakout, so if you wait for bar to close above the pivot high then your entry will be away from your stoploss.....and even after closing above the pivot high,the breakout can fail as it does in rejection.
But if the market is breaking out above the pivot high which is at previous resistance level, it has failed on earlier occasions or the market has travelled a lot of distance from its recent low as it comes to break the pivot high...then it is better to wait for bar to close above and make a sideways base above the pivot high .....and then we buy.
Hope that the above helps....
Good breakouts are the ones where the market goes sideways just below the breakout, consolidates and breaks out with force and then never looks back.
As against that if the market coming from long distance to the breakout point without sideways consolidation are suspect breakouts more likely to fail as market spends its bullish energy for travelling till the breakout point and after the breakout it has no energy left to carry the breakout through.
Profit taking is an art....look to take profits near previous supports/resistances, look for hammers, intertwining bars,virtual high/low patterns for booking profits.
When the sideways range broke on the downside,we took a short trade. The same bar closed within the sideways range showing a failure. The next bar is a green candle....so get out of short positions. Now wait with no position. Either the market will make another attempt to break the low so now we will take a short position below the red failure bar low. But in 70-80 % cases the market will breakout on the upper side. So the moment it breaks out on the upper side, you go long , thereby saving most of the the amount you will loose in the stoploss. Remember that breakout failures set up very good trades in the opposite direction and that is what the market did...
See the daily and hourly timeframe charts of all these in the evening for trading the next day...just glance these charts...and select good charts based on breakouts, tight sideways ranges, failures, TDST, inside bars after a breakout etc.....and then study those 5-7 scrips for trading for the next day in details. The scanning takes just 1-2 min per chart....
With the above exercise you will get good trading opportunities and you will be prepared with the action plan for trading next day....I still do it every weekend to see which scrips will give good trades next week. Just takes 50-60 min...
You should identify stocks which are in a trend ( either uptrend or downtrend ) and have paused for a while and undergoing sideways movement in tight consolidation or a small pullback in the form of a flag. These are the likely candidates for further breakouts and if they are on your watchlist, you will know when they breakout from the range.
Smart_trade
