Price Volume Breakout: Excellent Strategy To Make Money!
When it comes to trading in the equity markets there are several strategies that traders swear by for profitable and quick returns. Price volume breakout is one of the most popular and profitable strategies that can be executed with minimal drawdowns. Yogesh Supekar explains the details of the strategy while Vinayak Gangule provides some examples to help understand the concept and approach.
Ask this question to any trader who has spent time in the markets trading equities: how does it feel when a stock gives a breakout in the expected direction? As Jayesh Chordia, a regular trader who has been making profits on quite a consistent basis, says: “The feeling is sublime. When you enter a trade after watching a breakout, the profits are easy and quick and hence super-satisfying. At that moment you do feel as if you are the smartest person alive and the moment is that of victory. But to experience this feeling, one has to focus a lot and concentrate on the essentials while ignoring a lot of noise. Using price volume breakout successfully is a game of patience, study and observations.”
Defining Price Volume Breakout
Price volume breakout is nothing but a potential trading opportunity. Such opportunities are seen in trending markets moving either up or down. However, in sideways markets such opportunities will be minimised. A breakout happens when the stock price moves above the crucial resistance level or moves below the sacrosanct support level with increasing volume. The most important aspect here is to focus on increasing volume when the important support and resistance levels are broken.
If a trader wants to enter a position looking for a price volume breakout, it is essential that the important support and resistance levels should first be identified. Stronger the resistance and support level more valid the breakout can be and hence more profitable. One of the ways to identify if the resistance or support levels have been strong is to identify the number of times the stock prices have touched the resistance and support prices. For example, in 2016, Tata Motors made a double bottom at around Rs 298 per share odd levels. So Rs 298 becomes a strong support for the share and chances are if the support is broken with heavy volumes the share may witness a steep fall, which is exactly what happened with the share price of Tata Motors. When there are more touch-points the stronger are the resistance or support levels. A trader must always give due weightage to the strength of the support and resistance as it is not enough to simply identify the support and resistance levels. Once the support and resistance levels are identified along with their strengths, the current price patterns need to be gauged carefully. As is the case with every trade setup, a trader before taking a position has to pre-define the exit strategy and has to know when to book profits.
A breakout happens when the stock price moves above the crucial resistance level or moves below the sacrosanct support level with increasing volume.
Longer the support and resistance levels have been in play, the better the outcome when the stock price finally breaks out with volumes.
Price Volume Breakout Charts
Here are some examples to indicate how the price volume breakout works:
Ujjivan Financial Services Ltd.
The stock of Ujjivan Financial Services yielded a symmetrical triangle pattern breakout on January 24, 2020. During the formation of this pattern over 35 trading sessions, the volume of the stock was below its 50-day average volume. On a breakout day the stock witnessed almost 32 lakhs in volume, which was above its 50-day average volume. Thereafter the stock witnessed almost 19 per cent upside in 10 trading sessions.
Indraprastha Gas Ltd.
Considering the daily timeframe, the stock of Indraprastha Gas led to an ascending triangle pattern breakout as on January 15, 2020. On breakout day, the stock witnessed almost 84 lakhs in volume which was almost four times its 50-day average volume. Thereafter the stock witnessed almost 18 per cent upside in 12 trading sessions.
Bajaj Finserv Ltd.
The stock of Bajaj Finserv Ltd led to a breakdown of broadening formation, right-angled and ascending pattern as on March 4, 2020. Thereafter the stock witnessed almost 53 per cent correction. But if you look at the chart, the volume started increasing over three trading sessions before the actual breakdown happened.
J K Cement Ltd.
After registering an all-time high, the stock of J K Cement witnessed correction, which was nearly 47 per cent from the top. The correction was halted near the upward sloping trend line support formed by connecting swing lows from February 2016. The stock formed a reversal bullish pin bar candlestick pattern near the trend line support. The reversal from the support was further justified with strong volumes as the volume of the reversal bar was the highest since April 2019.
Avoiding the Pitfalls
The price volume breakout concept is universal and can be applied across different timeframes, namely, day trading, swing trading or any other style of trading. This virtue makes price volume breakouts very popular amongst traders. But traders must remember that some of the most explosive price movements are a result of channel breakouts and price pattern breakouts. Thus it is imperative for traders to first identify price patterns such as triangles, flags or head and shoulders along with the support and resistance levels to enter the trade. Most traders make the mistake of focusing purely on the price action of the stocks while the secret of the strength of the trend lies in the volumes.
Traders should be careful about the fact that the volume should be higher on the day of the breakout compared to the 50-day moving average. Always remember, higher the volume better it is to confirm the breakout. One of the most important aspects of profiting by entering into a price volume breakout is that traders should avoid falling for a false breakout. Hence, it is recommended to exercise precaution and enter the trade at 2-2.5 per cent higher from the breakout price if the breakout is on the upside and 2-2.5 per cent lower from the support prices if the breakout is on the lower side.
It is better to miss an opportunity rather than book losses in false breakouts. By practicing extreme caution while being patient for breakouts and studying the basic price patterns and focusing on strong support and resistance level, any trader can make money applying the price volume breakout strategy. Here the trick is to wait till the breakout happens and so patience is the key virtue in applying such a profitable strategy.