Breakouts are an important event on a technical chart in any stock or index , breakout can make immense profits for traders if they know how to trade the breakout of any stock , there are various techniques some prefer one over another , today you will learn a simple yet effective strategy that seems to work for me almost every time trading a breakout on a technical chart.
What is a breakout ?
A breakout on a technical chart refers to a stock or index breaking out of the range in which it has been contained , resistance act as an area of value where the stock faces selling pressure or too much supply hence causing the stock to reverse or revert from the resistance level or area on the technical chart but due to bulls deciding to break from this area the stock defies the resistance level and breaks out of it hence called a breakout.
How to identify a breakout on technical chart ?
The most simple and effective way to identify and trade a breakout is to look for a stock that is checking or testing it’s resistance level far too many times in a span of few days , if a stock tests resistance it’s fine because that is how resistance levels are formed but if the stock starts to test the resistace too frequently and the candlesticks start to consolidate near the resistance then it’s an indication of the breakout , you can place the stop loss few points below the lows of the consolidated candlesticks and wait for the breakout , more conservative traders can wait for the breakout and then the retest of the resistance turned support level but retest doesn’t always happen so trade accordingly to your risk appetite and have a proper risk management in place.
Breakout in Bajaj Finance
Above is the technical chart of bajaj finance on nse , look at the resistance line marked in blue color , it was previously a support which was broken and the stock then tested it again as resistance look at the consolidation of the candlesticks before the breakout, the candlesticks tested the resistance daily for 8 days continuously , this is totally unnatural and indicated that bulls are fighting hard with bears to take control of the market trend , after that a big green candlestick formed along with a very good volume and breakout occurred , the stock only zoomed higher and higher from there.
Breakout in ICICI general insurance
Look at the technical chart of ICICI general insurance on NSE , when the stock moved towards the resistance level marked in blue color the stock consolidated and candlesticks tested the resistance several times in a span of just 9 days , after that bulls finally gained control of the trend and broke out of the level and established a bullish market trend .
Here also good volume was present which is important for any breakout , a breakout on low volume is a false breakout and stock falls back below the resistance sooner or later.
Breakout in LIC housing Finance
Last example , look at the LIC housing finance technical chart on NSE , the stock moved towards the resistance and it was an already established resistance level on the technical chart and the candlesticks started consolidate near it and tested it for 5 days finally the stock broke out of the range and although it tested the resistance turned support the market trend after that was clear and the bulls came out victorious.
The retest after the breakout is quite common but since you have placed your stop loss below the lows of the candlestick consolidation as marked in images above you don’t have anything to loose and can ride the trend like a Boss.