How to Decide a Genuine Breakout in 60 Seconds - Mahakal Trading

How to Decide a Genuine Breakout in 60 Seconds

Welcome to mahakal trading, In my five years of trading experience, I have used many indicators, learned many trading systems. But ‘Breakout Trading' is one of my favorite trading systems.Below are the two reasons why I liked Breakout Trading system: 

1. It is simple to understand and easy to execute (all you need is 5 mins during live market) 
2. It shows RESULTS!  

Nowadays, I use this system rarely as I have transitted into intraday trading. Besides, I am a student and a blogger. Hence, I do not  have extra time for market. 

However, Mahakal Trading have been teaching this technique to numerous people who have benefitted from Mahakal Trading advice. 

This blogpost of Mahakal Trading( How to Decide a Genuine Breakout in 60 Seconds - Mahakal Trading ) is beneficial if you are a working professional or a business person and have the mindset to hold your trades between 2 days to 2 weeks. For everyone else, it’s just a piece of some information. I have explained only the concepts which are required for ‘Breakout Trading’. 

So, let’s begin!

How to Decide a Genuine Breakout in 60 Seconds

A traditional Breakout Trading technique is to enter the long trade whenever the price breaks the resistance trend line along with volumes or when the current candle closes above the trend line. This idea looks great in theory, but practically it’s difficult to get good results. We will have a look at some of the charts.

Image 1 – Breakout or False Breakout – Example-1

If you look at Image 1, the price has closed above the resistance trend line. Do you think it’s a genuine breakout? Don’t forget we are ignoring the big selling wick on the breakout candle (Big upper shadow). What this indicates is selling is strong (probably from Smart Money) at the current price level. Until the price negates this selling, it cannot go up, and it requires some time to neutralize this selling. Hence, the probability of a false breakout is very high. 

You can see the result in image 2.

Image 2 – Breakout or False Breakout – Example-1-Result

Image 3 – Breakout or False Breakout – Example-2

Once again, in Image 3, the price has closed above the trend line. But there is an opposite response from the sellers which resulted in a big wick. It indicates that the probability of a false breakout is very high, and we can see the result in Image 4.

Image 4 – Breakout or False Breakout – Example-2-Result

Image 5 – Breakout or False Breakout – Example-3

Once more an example is shown in Image 5 where the price has closed above the trend line. But there is an opposite response from the sellers, which resulted in a big wick. It indicates the probability of a false breakout is very high, and we can see the result in Image 6.

Image 6 – Breakout or False Breakout – Example-3-Result

Then What Separates the Real Breakout? 

Please take out a pen and piece of paper. What you’re about to learn next is significant and needs to be immortalized. 

The four things mentioned below are essential to separate a real breakout from fake ones:

1. A Big Breakout Candle 
2. Quick Time 
3. Absence of Opposite Party Response 
4. Good Volume 

(Don’t make any conclusion as of now. Read this chapter and the next chapter completely which covers the execution aspects with an open mind and then take a call.) 

A Big Breakout Candle 

As the name suggests, the breakout should happen with a big candle. Because the involvement of smart money at crucial price levels (in our case, near/at resistance trend line) will always result in a big move. 

Image 7 – A Big Breakout Candle Example-1

Image 8 – A Big Breakout Candle Example-2

If you look at the Images 7 and 8, breakout happened with a big candle as compared to the average candle size in that particular script. 

Quick Time 

I have included this parameter to filter out the fake ones. Often traders consider a few scripts in which the price has moved outside of the resistance trend line with small candles. It often happens when they draw an invalid trend line or less powerful trend line.

In this system, we always refer to the daily chart. Hence, the breakout should happen in one single day. We don’t consider the scripts which will display a small range of candles after breaking the resistance trend line. That doesn’t mean such scripts will not make a big move. But they are outside the scope of this system. Remember, no one will be able to catch all the big moves! 

You should have a system with a clear definition, and using such a system, you should be able to take trades with less emotions. Below are some images which don’t fit under these criteria.

Image 9 – A Failure of Quick Time Concept Example-1

Image 10 – A Failure of Quick Time Concept Example-2

Images 9 and 10 show such examples in which the price has displayed small candles after breaking above the resistance trend line. We should avoid such scripts. 

Absence of Opposite Party Response 

This exceptional quality stands out from the traditional Breakout Trading concept. As we look for the breakout of the resistance trend line, if it is a genuine breakout, sellers should be absent or smart money is keen to absorb any selling! 

It means we don’t like to see a big selling wick on the breakout candle because it indicates the presence of some serious selling.

Image 11 – Absence of Selling Wick – Example-1

Image 12 – Absence of Selling Wick – Example-2

Image 11 shows the complete absence of selling wick, which clearly indicates the intention of smart money. 

Image 12 shows the presence of slight selling wick. It is acceptable as selling wick size is almost negligible as compared to the size of the candle. 

One can use common sense to decide this. If you need a specific reference, then you can consider that the selling wick should be less than 20% of the entire body of the candle. 

For example, if the day low is 100, day high is 110, then day’s close should have been above 108 (Day range is 10 points and 20% of day range is 2 points).

Image 13 – Presence of Selling Wick – Example-1 (not suitable for a breakout)

Image 13 displays a considerable amount of selling wick on the breakout candle. Hence, it’s not a pick under our Breakout Trading.

Image 14 – Presence of Selling Wick – Example-2 (not suitable for a breakout)

Image 14 also displays a considerable amount of selling wick on the breakout candle. Hence, it’s not a pick under our Breakout Trading. 

Good Volume 

It is easy to understand and essential to get the confirmation that smart money is involved in the breakout scenario.

Image 15 – Good Volume – Example-1

Image 16 – Good Volume – Example-2

Images 15 and 16, the breakout candle has received a good volume spike, which indicates the involvement of smart money. 

Please note, it’s always a good idea to pick the scripts, which show some days of consolidation before the breakout. It gives an opportunity for sellers and indicates shorts build-up. The breakout on the upside indicates sellers have failed, and they are running for cover now. These kinds of scripts have higher chances of success. 

Summary 

• It is essential to filter the real breakouts to get success. 
• The first quality of a real breakout is that a breakout should have happened with a big candle. 
• The second quality is, a breakout should come in quick time. On the daily chart, it should display breakout criteria in one day. 
• The third quality is the absence of opposite party response, which is nothing but the absence of selling wick on the breakout candle in our system. 
• The fourth quality is that the breakout candle should receive a reasonable volume.

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