PDF Summary:How to Make Money With Breakout Trading, by Indrazith Shantharaj

While numerous trading strategies exist, few investors fully leverage breakout trading—a technique that capitalizes on sudden shifts in a security's price beyond a predetermined resistance level. In How to Make Money With Breakout Trading, Indrazith Shantharaj provides a comprehensive guide to profiting from authentic breakouts.

You'll learn the fundamental concepts of breakout trading and how to distinguish genuine market surges from misleading signals. Shantharaj outlines systematic methods for trade entry, stop-loss placement, and taking profits. He also addresses common questions regarding options, short selling, and position sizing. With insights from Shantharaj's trading experience, you'll gain invaluable knowledge for success in this underutilized strategy.

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• In certain cases, swift price changes reflect a correction of an asset's price to its perceived true value, which can be sustained if the previous pricing was significantly undervalued or overvalued.

The price must repeatedly recognize a consistent trajectory when connecting various peaks.

Shantharaj emphasizes the importance of a trend line that the price action consistently acknowledges through repeated touches or near approaches at various times, without substantially violating it. Each time the price respects the trend line, it underscores its importance as a pivotal threshold that either maintains or limits the direction of the price's movement. A consistent or significant deviation of the price from the established trend line may call its reliability into question.

Context

• A trend line is a straight line that connects two or more price points and extends into the future to act as a line of support or resistance. It helps traders identify the direction and strength of a trend.
• Historical price data can provide insights into how often and under what conditions deviations have occurred in the past, helping traders predict future price behavior.

Key factors and signals that pinpoint authentic breakout chances.

Shantharaj elucidates the key signals for identifying genuine opportunities for breakout, following an explanation on how to ascertain strong market trend lines.

A significant expansion of a candlestick's dimensions frequently signals an authentic breakout.

Shantharaj highlights that a significant candlestick moving upward and decisively crossing the daily chart's resistance line serves as an early sign of a genuine breakout. This significant price shift signals robust purchasing activity and hints at the possibility of continued upward movement. A pattern of minor, hesitant candlestick shapes during a breakout may suggest that buyers lack full conviction, which could result in a deceptive breakout.

A candlestick with a short upper shadow, indicating limited selling pressure, should signal the breakout.

Shantharaj underscores the importance of identifying a significant candle signaling a breakout, while also paying attention to the slightest hints of selling activity. A candlestick that signals a substantial market shift typically features a minimal or absent upper shadow, which is also known as a wick. Buyers initially pushed the price higher, but by the end of the trading sessions, active sellers had managed to lower it, as evidenced by a pronounced shadow at the top of the candlestick. A short upper wick signifies that buyers had the upper hand over sellers, which strengthens the credibility of the breakout.

Practical Tips

• Develop a habit of conducting mini-reviews of your sales interactions at the end of each day. Reflect on the body language, tone, and specific words customers used during conversations. This could reveal patterns or signals you might have missed, such as a customer hesitating on certain product features, indicating a potential objection you'll need to address in future sales pitches.
• Start a trading journal where you document every instance you spot the candlestick pattern with a minimal or absent upper shadow. Note the date, the stock, the market conditions, and the outcome after the pattern appeared. This will help you build a personalized database of these occurrences and their effectiveness, allowing you to refine your trading decisions based on historical data.

The ideal scenario would entail the breakout occurring rapidly, typically within the timeframe of a single trading day.

Shantharaj underscores the importance of a swift breakout, which is most effective when it occurs within a single trading period. This indicates a rapid increase in buying momentum that quickly pushes the value above the threshold of resistance, providing little chance for sellers to react. This rapid shift is characteristic of resolute measures taken by informed investors, who frequently aim to capitalize on opportunities swiftly.

Practical Tips

• Develop a pre-market routine to identify breakout stocks. Spend time each morning before the markets open to review news, stock forums, and pre-market movers. This can help you pinpoint which stocks are likely to experience a breakout, allowing you to plan your trades in advance and act swiftly once the market opens.
• Create a decision-making flowchart for potential investments to streamline your process. Determine the criteria that an opportunity must meet for you to consider it, such as industry growth potential, financial health, or competitive advantage. When an opportunity presents itself, run it through your flowchart to make a quick, informed decision without second-guessing.

An increase in the number of trades usually occurs alongside the breakout, signifying the involvement of knowledgeable investors.

Shantharaj's technique for identifying breakouts includes observing a substantial surge in market transactions coinciding with the breakout event. Shantharaj suggests that a significant increase in trading volume alongside a breakout serves as a validation of the price movement and signals greater participation from institutional investors, who are frequently regarded as the well-informed and strategic financial players. A considerable trading volume indicates that a large number of shares are being exchanged, reflecting a robust conviction in the stock's capacity for a substantial shift. Conversely, a low-volume breakout might suggest that the move is driven by a small number of participants and might not be sustainable.

Context

• Resistance is a price point where selling is strong enough to prevent the price from rising further, while support is where buying is strong enough to prevent the price from falling further.
• Institutional investors are subject to regulatory oversight, which can provide additional confidence to other market participants about the legitimacy and sustainability of the trading activity.
• These investors typically employ teams of financial analysts and portfolio managers who specialize in various sectors, providing a depth of expertise that supports strategic decision-making.
• Large volumes can lead to increased media and analyst attention, potentially attracting more investors and further driving the stock's momentum.
• Traders may encounter more false signals with low-volume breakouts, leading to potential losses if the price movement does not continue as expected.

The approach includes a systematic modification of trade positions to limit possible losses, a crucial aspect of proficient trading management.

Upon recognizing a true market breakout, Shantharaj details his methodical strategy for executing and managing trades.

Determine the exact timing for market entry, set clear benchmarks for limiting losses, and identify the profit goals for transactions that take advantage of market breakouts.

Shantharaj underscores the importance of establishing a definitive strategy before beginning any trading endeavors. He emphasizes the importance of predefined points for initiating trades, setting loss limits, and establishing profit targets to eliminate emotional judgments while trading.

Initiate your trade just above the apex of the candlestick that indicates the market has breached a resistance level.

Shantharaj recommends placing an order to purchase as soon as the price surpasses the high point of the candlestick that indicates a breakout. This approach ensures participation in the upward momentum following a confirmed breakout. Entering the market slightly above the highest point allows for small fluctuations and avoids premature involvement should the price briefly decline before continuing its upward trajectory.

Practical Tips

• Set up price alerts slightly above identified resistance levels to automate the monitoring process. Many trading platforms offer tools to set alerts when a stock price reaches a certain level. By setting these alerts just above the resistance levels you've identified, you can be notified the moment a potential trade opportunity arises, enabling you to act quickly and in alignment with the strategy.
• Start a journal where you document daily observations of small successes in your personal life or work environment. Note what actions or events led to these successes. Over time, you'll be able to identify patterns that signal a potential breakout, enabling you to double down on activities that contribute to upward momentum.

Set the stop-loss just below the lowest point of the candlestick that indicates the market's breakout point.

Shantharaj advises positioning the initial protective stop just below the lowest mark of the candlestick that signals a breakout. This approach minimizes the potential for substantial financial setbacks when market movements are deceptive, thus preserving capital for future investment opportunities. Placing the stop-loss just below the breakout candle's lowest point provides protection against normal price fluctuations and helps avoid premature trade exits due to minor retracements.

Practical Tips

• Collaborate with a trading accountability partner to review each other's planned trades and stop-loss placements. Find someone who is also interested in trading and agree to share your trading plans before execution. Discuss the rationale behind your stop-loss settings, especially focusing on the placement in relation to the breakout candlestick's low point. This peer review process can provide fresh perspectives and help you stick to disciplined trading practices.

An objective might be to aim for the beginning of the trend line or to align with the magnitude of the prior trading range.

Shantharaj emphasizes the significance of establishing profit objectives by integrating technical analysis with principles of risk management. He advises traders to set their initial target at levels that previously served as obstacles to the asset's ascent in value. A technique involves identifying the starting price of the most recent decline or the size of the previous trading period as potential targets. This approach operates on the assumption that market prices often revert to areas of value that have been recognized before.

Other Perspectives

• Markets are influenced by a multitude of factors, including economic indicators, political events, and company fundamentals. Technical analysis may not capture these elements, and thus, profit objectives based on technical analysis alone may be incomplete.
• This approach assumes that the market has a memory and that participants will act similarly to how they did in the past, which may not always be the case.
• The efficient market hypothesis posits that all known information is already reflected in asset prices, implying that recognized areas of value may not necessarily act as magnets for price reversion if the market has already adjusted for new information.

Adjusting the stop-loss order to align with the market's prevailing price is crucial for reducing risk and protecting profits.

Shantharaj underscores the importance of incorporating a mechanism that enables a progressively adjusting stop-loss in his trading strategy. This proactive approach to risk management not only protects the investment but also ensures that profits are maximized during the instances of successful trades.

To reduce possible losses, it's wise to modify the stop-loss when market reactions to the breakout appear sluggish or suggest that there is pressure to sell.

Should the security's price fail to rise quickly and decisively after breaking through resistance, or should there be signs of increased selling activity, such as small candlesticks, doji patterns, or other shapes suggesting a downward trend, it becomes crucial to adjust your risk management approach accordingly. This approach involves methodically moving the protective stop order upwards as the asset's value climbs, which helps to lock in profits while minimizing potential losses.

Practical Tips

• Engage with a community of traders through online forums or social media groups to share observations about securities that don't perform as expected after breaking resistance. By discussing with peers, you can gain insights into how others might adjust their strategies in similar situations, which can inspire you to refine your own approach.
• Create a personal rule-based system for adjusting stop orders by defining specific criteria. For instance, you might decide to move your stop order up by 1% for every 5% increase in the asset's value. By sticking to this rule, you ensure that you're consistently locking in profits while allowing for growth, and you can track the effectiveness of this strategy over time.

Modifying the level at which losses are curtailed often results in a scenario where the transaction does not result in considerable gains or suffer major losses, thus protecting the investment.

Shantharaj recognizes that not all authentic breakouts lead to significant financial gains. Occasionally, following the breakout, the price might experience a minor retracement or begin a period of lateral trading. Altering the safety stop on the trade could lead to an early exit from the deal, potentially resulting in a small gain or a slight setback. However, he emphasizes the benefit of embracing such an outcome rather than persisting with the transaction and risking a steeper drop should the expected initial rise fail to materialize.

Context

• Traders may backtest different stop-loss strategies using historical data to find the most effective approach for their specific trading style and objectives.
• Also known as sideways trading, this occurs when the price of an asset moves within a range without a clear upward or downward trend, often indicating market indecision.
• A safety stop, often called a stop-loss order, is a predetermined price level set by a trader to limit potential losses on a trade. It automatically triggers a sale if the asset's price falls to this level.
• By exiting a trade early with a small gain or loss, traders free up capital and resources to pursue other potentially more profitable opportunities, rather than being tied to a stagnant or declining position.

Q&A and additional resources for implementing the breakout trading system

Shantharaj wraps up his guide by tackling frequently asked questions regarding his trading strategy and provides further materials for readers eager to expand their understanding in the realm of financial trading.

Essential inquiries and their corresponding answers tackle prevalent issues, including the practice of short selling, the application of options/futures, and the control of position sizing.

Shantharaj dedicates a section to address the most frequently asked questions he receives from readers, recognizing the importance of clarity and practical application. He discusses the practicality of applying his strategy for initiating short positions, trading options and futures, and calculating the correct trade size. Shantharaj provides his readers with a comprehensive understanding of his approach, detailing both its benefits and limitations, and customizes it for application within the Indian stock market environment.

Practical Tips

• Implement a "single-tasking" approach to your daily routine to foster clarity. Choose one task you typically struggle to complete due to distractions or multitasking. Commit to working on this task uninterrupted for a set period each day, such as 25 minutes, followed by a 5-minute break. This technique, often referred to as the Pomodoro Technique, can help you focus and bring a clear, practical approach to completing your tasks.
• Create a spreadsheet tool to automate your trade size calculations based on your current portfolio and risk tolerance. Input variables such as your total capital, the percentage you're willing to risk, and the volatility of the asset you're considering. Use the spreadsheet to quickly determine the appropriate size for each hypothetical trade, helping you to internalize the principles of risk management.
• Use habit-tracking apps to reinforce the application of new concepts by setting specific, measurable goals related to the concept. If your goal is to be more mindful throughout the day, set reminders to take short mindfulness breaks and use the app to track your consistency and reflect on how it's affecting your stress levels or focus.
• Develop a habit of reading Indian financial news and analysis from a variety of sources to gain diverse perspectives. Dedicate at least 30 minutes each day to reading financial news from Indian newspapers, business channels, and online financial blogs. Take notes on recurring themes, expert opinions, and market trends. Over time, this will help you understand the nuances of the Indian market and make more informed investment decisions.

The author also shares valuable knowledge and personal experiences gained through his trading journey.

Shantharaj's book acts as an all-encompassing manual that guides readers through his unique trading approach focused on market surges, while also providing additional resources to aid them in becoming skilled traders. He provides a carefully selected bibliography for further exploration into the principles of market sentiment, technical chart evaluation, and the management of financial exposure. He also highlights notable Twitter traders worth following, offering insights into the various strategies and techniques within the domain of trading in financial markets. He shares essential knowledge derived from his considerable time spent in the trading sector, emphasizing the importance of self-control, managing one's emotions, and continuous learning to achieve steady success.

Practical Tips

• Practice recognizing market surges with a stock market simulator. Use a simulator that mirrors real market conditions to practice identifying and reacting to market surges without any financial risk. This hands-on approach will help you gain experience and confidence in spotting surges and making decisions based on them.
• You can start a journal to track your emotional responses to market changes, helping you understand your own market sentiment. Begin by noting down your feelings and thoughts whenever you make a trade or when there's significant market movement. Over time, you'll be able to spot patterns in your emotional reactions and potentially adjust your trading strategies to be more objective.
• Create a Twitter list to organize and monitor the insights from the traders you follow, which allows for a focused feed on trading strategies. By doing this, you can easily switch between your general Twitter feed and your curated list of traders, ensuring you don't miss valuable insights amidst the noise of other tweets. For example, you might have a list named "Trading Gurus" that you check each morning before the markets open to get a sense of the day's potential trends and strategies.
• Start a virtual trading club with friends to share insights and practice strategies. By creating a group chat or a weekly video call, you can discuss market trends, share resources, and simulate trades based on the knowledge you've gained. This peer-to-peer learning can reinforce your understanding and provide a safe space to test out theories before investing real money.
• Commit to continuous learning by starting a "skill swap" with friends or colleagues. Each person teaches the others something they're knowledgeable about, which can range from cooking a signature dish to using a new software tool. This not only broadens your skill set but also reinforces your own knowledge by teaching it to others.