Breakout Trading Decoded: What is it? How to Make Money with it?

What is Breakout Trading?

Breakout trading refers to the strategy of buying or entering a long position when the stock price finally breaks the resistance level.

Resistance: The resistance level is an area from which the stock price has fallen multiple times, acting as a barrier (ceiling) to the stock. 

When the stock price finally breaks through the resistance level, it is called a “Breakout”.

Support: Similarly, an area from which the stock is bouncing back multiple times is called “Support” (floor). 

If the stock price breaks down the support level, it is called a breakdown, which is the opposite of a breakout.

As a trader, it is crucial to know the support and resistance levels as they are the key levels for determining entry and exit points in the market.

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What Happens When the Stock Breakouts?

Stocks usually have a big move after the breakouts because the momentum is high.

After the resistance level is broken, it becomes the support of the stock during a price correction or retracement.

The stock retests the resistance levels again, and this time it becomes the support level of the stock. 

This is called as law of polarity.

Some Secrets of Breakout Trading

1. A breakout with “heavy volume” will give you bigger price movements. As a result, big profits can be printed this way.
2. A breakout with high volume is a sign of a real breakout. This means now the big money / big player has entered which will be followed by more buying. Your ride has picked up the speed with momentum.
3. Breakout trading in itself is a complete trading strategy used by many traders. Some traders solely and only trade on the breakouts.
4. If the breakout is real, the risk is very limited in this strategy and the profits are huge. So, keeping an eye on high-volume breakouts can be a smart move for traders.

What is a False Breakout?

It’s important to understand what a false breakout is. As stated above, the false breakout is a fake breakout.

Essentially, It is an unsuccessful attempt to break out. It means more buyers tried to enter, but sellers pushed the price down rejecting it. 

As a result, an unsuccessful breakout attempt.

As there is not enough momentum, the price cannot be sustained or pushed higher. 

This often results in further selling and a quick drop in the stock price.

That’s why a false breakout is sometimes called a fake breakout or a trap.

How to Make Money with Breakout Trading

I recently gained a lot of insight on how to make money through breakout trading by listening to an audiobook called

 “How to Make Money on Breakout Trading” by Indrazith on Kuku FM. 

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The book provides a comprehensive guide on breakout trading and how it can be used to make big money.

I found it interesting to learn that even the candlestick pattern on key levels such as the support and resistance, along with the volume, can be used to confirm whether a breakout is genuine or a fake-out (a false breakout or a trap).

1. Identify support and resistance levels where the price has reversed multiple times.
2. When the price breaks or closes outside one of the key levels (support or resistance) with a spike in volume, Boom!! It’s probably a legit breakout!
3. Initiate a trade in the direction of the breakout.
4. Set a STOPLOSS a little below the support or the resistance broken to limit risk.
5. You can then ride the expected uptrend to reach your defined profit target or keep trailing SL to book BIG PROFITS!!