Figuring out if a breakout is genuine? (EDUCATIONAL)
A perfect breakout setup has :
(A) Volume Expansion- Whenever a breakout happens the first thing you might want to check out is if Volumes are increasing i.e. people are getting into it or not. If there is no interest of people in that stock, that breakout might not sustain.
(B) Popping out of highest traded clusters- I don't know why but people hardly use volume indicators like Volume Profile which give you an idea. Volume is plotted horizontally but in VP you get volumes plotted vertically along with the price so it becomes very easy to figure out if people are interested or not. Whenever price moves out of a highest traded zone/cluster, it indicates that either bulls or bears are back in action depending on the breakout side.
(C) Bullishness in Momentum Indicators like RSI, MACD- Again these momentum indicators work well on higher timeframes like daily, weekly and tells us about the momentum and strength. Here the RSI was struggling nearly an year for breaking above 60 and this time it did so it tells us about the strength of a breakout.
(D) Ideal Risk to Reward is an important factor that you definitely need to check out. For swing/positional 4R (1:4 Risk to reward) should be there and Risk should always be calculated before taking trade with position size defined!
HAPPY Trading!
(A) Volume Expansion- Whenever a breakout happens the first thing you might want to check out is if Volumes are increasing i.e. people are getting into it or not. If there is no interest of people in that stock, that breakout might not sustain.
(B) Popping out of highest traded clusters- I don't know why but people hardly use volume indicators like Volume Profile which give you an idea. Volume is plotted horizontally but in VP you get volumes plotted vertically along with the price so it becomes very easy to figure out if people are interested or not. Whenever price moves out of a highest traded zone/cluster, it indicates that either bulls or bears are back in action depending on the breakout side.
(C) Bullishness in Momentum Indicators like RSI, MACD- Again these momentum indicators work well on higher timeframes like daily, weekly and tells us about the momentum and strength. Here the RSI was struggling nearly an year for breaking above 60 and this time it did so it tells us about the strength of a breakout.
(D) Ideal Risk to Reward is an important factor that you definitely need to check out. For swing/positional 4R (1:4 Risk to reward) should be there and Risk should always be calculated before taking trade with position size defined!
HAPPY Trading!