How to identify Good Volume Breakouts

At investarindia.com, one of our favorite buying strategies is the volume breakout strategies, so much so that in the past also we have blogged about it. But considering that the Nifty started a new short-term and long-term uptrend in March, in this post we will try to go into even more specific guidelines on how to identify good volume breakout candidates.

In a previous post, we had highlighted 2 factors that are very important for ensuring that a resistance level is strong (and hence the break of that resistance is important and significant). These were:

  1. The number of touches on the resistance.
  2. The volume at the time of the breakout.

A stock is said to break out on strong volume, when a strong resistance is broken on high volume. In other words, both the factors above should be present to ensure that the chances of success for the trade are high. There are many other factors that are important (and we cover them extensively in our Basics of Technical Analysis webinarin fact almost half the 5-hour webinar is spent on just Support/Resistance/Trend Analysis and the Volume Breakout strategy ), but these are the most important.

What should be your entry point when a stock breaks out? Ideally, it should not be the exact resistance but a little bit above resistance (say 2-2.5%). This is to avoid false breakouts, as many times a stock will breakout, and soon come back down. We call it a ‘fakeout tolerance’, i.e. a tolerance to avoid false breakouts.

What are the other factors to consider when ensuring the volume breakout trade is successful?

  1. The number of touches should be high and the resistance should be well-defined.
  2. The volume should be high on the day of the breakout compared to the 50-day moving average, the higher the better. (In Investar, it is very easy to see this number as Vol%, and it is defined as (today’s volume*100 /50-day average volume)
  3. Before the breakout, if the stock has gone down on low volume, it’s a plus.
  4. Make sure there is a good risk/reward ratio. Ideally, I recommend  a 1:3 ratio. e.g., let’s say the resistance breakout price is at Rs 100, and you purchase the stock at Rs 102 (2% tolerance). And let’s say you put a stop-loss at 7%, then it makes sense to take the trade only when your potential reward (i.e. the next target, which incidentally is the next resistance, is Rs 124 and above and gives you atleast a 21% gain (7/21 = 1/3 risk reward ratio).
  5. Timing of the trade. Its generally a good idea to start looking for breakout buys at the start of new rallies (long-term, short-term or intraday). e.g., as our recent post indicated, the Nifty broke its all-time high on both the Weekly and Daily chart. This indicated a start of both a short-term and long-term uptrend and hence a good time to start looking for volume breakouts.
  6. For short-term and long-term breakouts, it also helps if the fundamentals are good. This post explains how to pick growth stocks using good fundamentals.

One of the challenges for finding volume breakout stocks is that if you use the EOD screener to identify volume breakouts, a lot of the stocks have gone up much beyond the 2% above resistance entry point and are difficult to enter afterwards. We introduced the “Daily” timeframe scans in Investar just for identifying such stocks. When you set the Investar Scans/Advisor timeframe to “Daily”, the software scans in the Daily timeframe, but uses the current day’s candle also for scanning. This facilitates finding new highs and gainers on strong volume in intraday and hence helps indentify volume breakout candidates which you would otherwise miss.

This was best demonstrated in a webinar we did recently (called “Using the Intraday Screener and Scan Alerts” on March 27th, 2014 – you can download the webinar recording here), where we conducted a webinar in Live Market and one of the things we focused on was how to pick volume breakout stocks for short-term and intraday. In this webinar, we highlighted the importance of using the Daily timeframes also for finding out breakout candidates. One of the stocks that we picked for a short-term breakout using the Daily Timeframe scans went up by almost 10% in a day. We found this stock in the Daily timeframe scan when it was at Rs 308, and it had shot up to Rs 316 by the end of the 1-hour webinar and to Rs 340 by the end of the day (and as you can see from the chart, it would have been difficult to enter this trade if you only used the EOD screener). It satisfies points 1,2,3 and 5 that we listed above :

NAVINFLUOR breakout – identified using Daily timeframe scans

As you might have rightly guessed, you need to be able to predict the support/resistance levels properly in order to find good volume breakouts and set proper profit targets! In fact, mastering Support/Resistance Analysis is extremely important if you want to be a good Technical Analyst because it is indispensable for not only setting profit targets, but also exact entry and exit points, setting stop losses, etc. So much so, that we feel that you should not enter the market without doing proper Support/Resistance Analysis and Trend Analysis of Nifty or Sensex. If you need help in perfecting the art of drawing support/resistance levels, you should consider attending our live webinar, “Basics of Technical Analysis”, where we go through these aspects in great detail in a live interactive setting showing you practical examples of how to enter, how to exit, how to set targets and stop/losses, how to calculate risk reward ratios to come up with better trades etc.

5 thoughts on “How to identify Good Volume Breakouts

  1. Which product is required for identification of volume breakout in daily TF and uses current day’s candle also for analysis. I am interested in Nifty-50 sticks. Please let me know Investar Nifty-50 Special 4.0 (EOD) is sufficient for that?

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