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Sunday 2 November 2014

Intraday trading using Breakout Method

A rise in a price of security above a certain level called as resistance or a drop below a certain level called as support is called breakout. A breakout is used to signify a continuing move in the same direction. It can be used by technical analysts as a buy or sell indicator.
Look at the image below for graphical explanation.

 How can breakout help us in intraday trading?

Every trading underlying has a trading range at any day. In other words, on any given day, the trading underlying will move between two prices (high and low). Our main strategy should be to trade the underlying when it is about to start its biggest move for intraday (May it be upside or downside). To explain this, let us take a very simple example

Example 1: 

The stock ABC is trading at 100 at any point of time during the day. In another half hour it starts its sharp upward movement and creates new high. Our main strategy should be to catch a part of that sharp move (we cannot take the benefit of entire sharp upward movement or downward movement. And this is what we try to do with breakout method. We try to take benefit from a small part of sharp upward movement or downward movement.

How to identify breakout levels?

The most important is how to find the breakout levels. This section will tell how to find the breakout levels. To find the breakout levels for any given day, we take into account previous day’s range. Based on previous day’s range and current day’s fluctuation, we find the breakout levels. Based on previous day’s range, we create 3 areas of trading. These 3 areas are

1: Best possible Trading
2: Good Trading
3: Useless Trading

Follow the below steps to calculate the breakout levels.

Step 1: Find out the previous day’s high and low.

Step 2: Find out current day’s high and low at any point of time.

Step 3: Note down 2 fractions (0.45 and 0.75)

Step 4: Find the range of previous day. (Previous day high – Previous day low)

Step 5: Multiply the range for previous day with the two fractions from step 3. (0.45 and  0.75). Mark this result as MF1 and MF2.

Step 6: Now find current day’s range (Today’s high – Today’s low)

Step 7: Find out whether current day’s range is below MF1, between MF1 and MF2 or  above MF2.

Step 8: If current day’s range is below MF1, then breakout levels are Upside Breakout =  Today’s low + MF1. Downside Breakout = Today’s high – MF1.

Step 9: If current day’s range is between MF1 and MF2, then breakout levels are Upside Breakout = Today’s low + MF2. Downside Breakout = Today’s high – MF2.

Step 10: If current day’s range is above MF2, then DO NOT TRADE.

Step 11: Once we know the breakout levels, we can buy above Upside Breakout and sell below Downside breakout.

Step 12: Target should be 0.7%.

Step 13: Stop loss should be 0.8% or if the underlying is trading below our buy price or  above our sell price for more than 10 min, then square off the position.

Step 14: This trading system is best suitable for those who can trade in multiple stocks and are very active in trading. One should not expect more than 1% from this system.

Step 15:  You can find the breakout levels for free using the below website

Note: This system should be used till 2 pm (or 1 and half hour before market closes. Because there is no point finding breakouts in last minutes of trading session)

Examples with various scenarios
Example 1:

 When the current day’s range is below MF1.
Let us take an example of Reliance for 13th Apr 2010.
Its previous day high/low = 1145 / 1122.65.
Range = 1145 – 1122.65 = 21.35.
MF1 = 0.45 * range = 9.6075
MF2 = 0.75 * range = 16.0125
Current day’s high/low = 1132 / 1123.
Range = 1132 – 1123 = 9.
So current day’s range 9 is less than MF1.
So upper breakout = low + MF1 = 1123 + 9.6 = 1133 (approx).
Lower breakout = high – MF1 = 1132 – 9.6 = 1121.95 (approx).
As seen in the below image, sell triggered at 1121.95.
Target didn’t got achieved in first fall but price didn’t remain above our sell price for more than 10 min. so we hold our short. Finally after 1-2 hr our target of 1114 got achieved.

Example 2: 

When the current day’s range is between MF1 and MF2.
Let us take an example of HDFC for 13th Apr 2010.
Its previous day high/low = 2856.50 / 2791.20.
Range = 2856.60-2791.20 = 65.3.
MF1 = 0.45 * range = 29.385.
MF2 = 0.75 * range = 48.975.
Current day’s high and low at 9:30 am was 2834 / 2797.
Range = 2834 – 2797 = 37.
So current day’s range 37 is between MF1 and MF2.
So our upper breakout = low + MF2 = 2797 + 48.975 = 2846.
Lower breakout = high – MF2 = 2834 – 48.975 = 2784.95.
As seen in below diagram, sell triggered below Lower breakout and target got achieved.

Some Salient Features of this method

1. This method is best suitable in trending market.

2. This method is suitable only for scrips with huge volume.

3. This system should be used in multiple scrips with small profit in each scrip to earn  significantly in intraday.

4. This is simple mechanical method.

5. This method can be used anytime during the day. The only constraint is to use it after 20 min of market opening and before 90 min of market closing.

6. This method is good to identify whether a particular stock can be traded for rest of the day or not.

7. The trader has to be active to do multiple trades during the day.

8. This system is best for part time trader, who wants to earn small profit in intraday and consistently earn the profit.

9. The method helps in identifying whether a scrip has done any breakout during the day or not at any given point of time. 

Article : By Sourabh Gandhi


Parag Patil is a technical analyst and trading system designer with stock excel programmer. I hope the articles and live chart of nse future and mcx on this Website will be as helpful and profitable to you . I try to update and post new articles tips everyday. My motto is to encourage the traders, so that they should able to understand the technique views behind the moment of stocks. I have deeply analyzed with many technical indicator with parameter and added to my amibroker afl. And even taken backtest report which is never being implemented. Any of the analyst expect me. Seeing all this you may understand that my views is more technical than commercial. If you are profited by my views I fill happy.

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