The share market is an equal opportunity space for all kinds of investors and traders. While most people prefer investing, i.e., buying shares and selling them at a future date, after booking a reasonable profit, most others prefer to enter into day-trades. Although day-trading is quite complicated, it enables traders to book profits in a shorter time frame. However, players in this market must leverage several strategies to their benefit. Many traders prefer the intraday breakout trading strategy. Here’s all you need to know about it.
What is breakout trading?
Breakout trading is defined as a type of momentum trading, which requires the trader to enter and exit the intraday market quickly. In this type of trading, traders try to enter the market, when the script’s price moves outside a specific price range (which could be support or resistance). It requires traders to attempt to enter a trade right from the apex point, wherein the breakout is expected to happen. To make this strategy work, traders have to be both quick and aggressive and potentially trade in higher volumes. Also, traders don’t have to wait to know if the trade will work or not, as it becomes evident instantly.
How to read the breakout indicator?
Now that we know breakout meaning in the stock market, let’s understand the term, i.e. by reading trading charts and patterns. In intraday trading, breakout means to move below support or above resistance. Here’s how you can read the price breakout indicator:
1. From the first support and resistance, you will see a break of a previous candle’s low or high.
2. From the last swing’s high or low, you can gauge the shorter-term support as well as resistance
3. You can also see significant support and resistance
4. The trend line or moving average also appears in this trading chart.
What are the advantages of intraday breakout trading strategy?
Leveraging the breakout strategy can prove to be quite beneficial. When you employ this strategy, you will find that the momentum is almost always in favour of the trader. When you trade breakouts, you can enter your trade, knowing fully well that you have momentum is in your favour. Also, you do not have to ever worry about missing any moves that may be occurring in the market. As such, you can catch the significant trends as they occur, which may not come if you choose to employ most other strategies – pullback, for instance.
Steps to employ the breakout trading strategy
Here’s how you can execute the breakout strategy
1. Recognise a definite price range and mark the price level on the breakout indicator
To successfully employ the strategy, you must first identify significant and precise price range levels, which are typically a “V” shape swing high. The price level can be your ultimate breakout trading level.
2. Await a break and close over the resistance level
You now need to identify a resistance level. Once you do so, you have to wait for the strategy to work patiently. As a trader, you will need a breakout along with a breakout candle to close your trade above your resistance level. This sign indicates that the bulls are controlling the trade.
3. Buy scripts at the breakout candle closing price when the VNMA stretches up
This is the last step in the process of breakout trading. Here you need to confirm from the VNMA (Volume-Weighted Moving Average) breakout indicator and see it stretch up. Ensure that the moving average has a more profound inclination towards the upside.
Three instances when you should avoid employing the breakout strategy
As is the case with most intra-day trading strategies, you should be cautious when you employ any strategy, including the breakout strategy. There are three substantial instances in which you should refrain from trading breakouts. They are as under
1. Refrain from trading breakouts when the stock market is quite far from the support and resistance levels. Check if there are any obstacles or hurdles overhead or underfoot, which could potentially obstruct any advance or decline.
2. You should avoid using the breakout strategy if you do not see the tight trading range of consolidation on the breakout indicator before the breakout occurs.
3. Avoid this strategy when the break is set against a potential dominant pressure.
When employing the breakout trading strategy, you must also check the breakout indicators and ensure you are on the right track. This is true of any intraday strategy you may be leveraging. If you notice that your strategy is not working as per the expected momentum, approach your investment advisor and see if it can be rectified. If you are a beginner, we recommend you opt for Angel Broking advisory services.