How to Identify 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 reality it's difficult to get good results. Let's take a look at some charts.

 the price has closed above the resistance trend line.

Don't forget we are ignoring the big selling wick on the breakout candle (the 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. So the probability of a false breakout is very high.

You can see the result in Image 

Once again, in Image  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

Image -Breakout or false breakout? (Example )

Once more an example is shown in Image  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 3.6.

Then What Separates the Real Breakout From the Fake?

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

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

1. A big breakout candle

2. Short time

3. Absence of opposite party response

4. Good volume

Don't make any conclusions as of yet. Please read both this chapter and the next (which covers the execution aspects) completely and with an open mind, and then feel free to make 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 or at the resistance trend line) will always result in a big move.

Image Breakout or false breakout? (Example )

Once more an example is shown in Image 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 

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

Short 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. This happens when they draw an invalid trend line or a less powerful trend line.

In this system, we always refer to the daily chart, so 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 emotion.

Below are some images which don't fit under these criteria.

Images   show 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 shows the complete absence of a selling wick, which clearly indicates the intention of smart money.

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

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

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

Image Presence of a selling wick: not suitable for a Breakout (Example 1)

Image displays a considerable selling wick on the breakout candle. Hence, it's not a pick under our breakout trading system.

How to Identity a Genuine Breakout in 60 Seconds

Image 3.14 also displays a considerable selling wick on the breakout candle. Hence, it's not a pick under our breakout trading system.

Good Volume

It is essential to get the conformation that smart money is involved in the breakout scenario.

How to Make Money with BREAKOUT TRADING

If you look at Images  , the breakout candle has received a good volume spike, which indicates the involvement of smart money.

Please note that 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 short build-up. The breakout on the upside indicates that sellers have failed, and that 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 the breakout should happen with a big candle.

The second quality is that a breakout should come in a short time. On the daily chart, it should display the breakout criteria in one day.

The third quality is the absence of opposite party response, which is nothing but the absence of a selling wick on the breakout candle in our system.

The fourth quality is that the breakout candle should receive a reasonable volume.