Breakout Method - Scalping Intraday Method

Published: 12th July 2010
Views: N/A

What is breakout? What is 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.

If you look at the above image, you will find two important lines. (Upside Breakout and Downside Breakout).
What this line means to us is, if price moves above upside breakout, we will buy the underlying (long) and if the price moves below downside breakout, we will sell the underlying (short).
As you can see, when price moved above upside breakout, it went more up and made a new high.

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 andMF2.
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
Breakout Calculator
Breakout Calculator

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)

Report this article Ask About This Article

More to Explore