Breakout - Tradelegend

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7 Rules of the
BREAKOUT STRATEGY
What is Breakout?
A Breakout is a St ock price moving out side a defined Support or Resist ance level wit h increased volume. A Breakout
T rader ent ers a Long posit ion aft er t he St ock price breaks above Resist ance or ent ers a Short posit ion aft er t he St ock
breaks below Support .
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We will answer your quest ions
The price broke the Resistance Trendline with high volume.
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Similarly, the price broke the Support Trendline with high volume, few recognize it as a Breakdown.
What is a False Breakout?

A False Breakout is also recognized as a ‘Failed Breakout’.
A Failed Breakout occurs when a price moves t hrough an ident ified level of Support or Resist ance but does not have
enough moment um t o maint ain it s direct ion. Since t he validit y of t he Breakout is compromised, and t he profit
pot ent ial significant ly decreases, many t raders close t heir posit ions. A Failed Breakout is also commonly referred t o as
a False Breakout .

The price showed the characteristics of a Breakout. However, it failed in its attempt and broke on the opposite side.
There are 7 Rules to Identify a

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Quality Breakout Trade
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Rule no. 1
Trendline Should be Valid
For a T rendline t o be valid, minimum 3 point s or pivot s should be connect ed. If only 2 point s or pivot s are connect ed in
a T rendline t hen it will be considered as an Invalid T rendline as it does not provide enough dat a t o accurat ely reflect
t he t rend. T he reason for t his is t hat 2 point s can only show a single t rend direct ion, whereas 3 or more point s can
demonst rat e a t rend’s consist ency and reliabilit y.
The above image shows an Invalid Trendline

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The above image shows a Valid Trendline
Rule no. 2
Breakout Should happen with Increase in Volume
A valid Breakout should happen wit h an increase in volume as compared t o t he previous candle’s volume. An increase
in volume indicat es a rise in int erest from Buyers (or Sellers in Breakdown), confirming t he significance of t he Breakout .
Wit hout an increase in volume, t he breakout may not be a genuine represent at ion of market sent iment and could be
prone t o reversal. In ot her words, a Breakout accompanied by an increase in volume indicat es a high probabilit y of
sust ained moment um in t he direct ion of t he breakout , while a breakout wit hout a corresponding increase in volume
may be a false signal, and t raders should exercise caut ion when int erpret ing such signals.
T herefore, t raders should pay close at t ent ion t o t he volume when ident ifying a breakout t o det ermine whet her it is
valid and reliable.

Above is an example of a valid Trendline Breakout with Increase in volume

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Above is an example of a valid Trendline Breakdown with Increase in volume
Rule no. 3
There Should not be an Opposite Reaction
T here Should not be an Opposit e React ion in t he Breakout /Breakdown candle. An opposit e react ion t o a breakout
candle could signal t hat t he breakout was not valid or was false, leading t o incorrect t rading decisions. T herefore,
t here should not be opposit e react ions in a breakout /breakdown candle in a valid t rendline.
An opposit e react ion in a breakout candle indicat es t hat t here is a Selling pressure in t he breakout candle (and an
opposit e react ion in a breakdown candle indicat es t hat t here is a Buying pressure in t he breakdown candle).

Above image is an example of Opposite reaction in the Breakdown candle.
Rule no. 4
There Should Tnot
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There Should not be any Opposing Institution Zone in the Higher Time Frame near the breakout or breakdown of
a valid Trendline. If a Breakout of a valid Trendline happens and there is an Institution Selling Zone in the Higher
Time Frame near that then it can be an Institution Trap and that breakout may convert into a False Breakout.
Same happens in Breakdown, if there is an Institution Buying Zone in the Higher Time Frame near that then it can
be an Institution Trap and that breakdown may convert into a False Breakdown.
Above image is an example of a Breakout converted into a False Breakout because of Institution Selling Zone in the
Higher Time Frame.
Rule no. 5
Entry Point will be Above the close of Breakout
Candle
When a Breakout of a valid T rendline happens t hen we have t o plan our Ent ry point just above t he close of a Breakout
candle. In case of Breakdown of a valid T rendline, Ent ry point will be just below t he close of a Breakdown candle.

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Above images are representing the Entry point in a Breakout and Breakdown candles.
Rule no. 6
Stop Loss Point will be below the Breakout
Candle
When a Breakout of a valid Trendline happens then we have to plan our Stop Loss point just
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below the Breakout candle. In case of you like usof
Breakdown toacall 
you Trendline, Stop Loss point will be
valid
just above the Breakdown candle. We will answer your quest ions
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Above images are representing Stop Loss point in Breakout and Breakdown candles.
Rule no.7
Target Should be within Opposing
Institution Zone
Whenever we plan a Breakout/Breakdown Trade, we have to plan a minimum RR (Reward to Risk
Ratio) of 2:1. While planning a Breakout/Breakdown trade, if the RR till the Opposing Institution Zone

in the Higher Time Frame (Institutions Buying Zone in Breakdown and Institutions Selling Zone in
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Breakout) is less than 2:1 then we will reject that trade as the price may react from the Opposing
Institution Zone and may convert into false breakout/breakdown.
If we are not getting the desired RR, then we must reject that trade as it can affect our Risk
Management and Money Management.

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Here is an example of how to calculate
RR till Opposing Institution’s Zone

Who are these Institutions?
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that, e/) First we have to understand
who the Market Players are.
There are 2 types of Market Players: -
Big Players
Small Players
Big Players:-
Big Players are t he Inst it ut ions (FII’s- Foreign Inst it ut ional Invest ors & DII’s- Domest ic Inst it ut ional Invest ors) who
invest in t he St ock Market . T hey have T housands of Crores of Capit al t o invest in t he St ock Market .
A Foreign Inst it ut ional Invest ors (FII’s) is a group of invest ors who invest s in a foreign count ry ot her t han t heir home
count ry. T hese invest ors may be hedge funds, charit y t rust s, pension funds, invest ment banks, mut ual funds,
insurance companies, or high-value debent ure bonds.
FIIs are incorporat ed out side India and must regist er t hemselves wit h SEBI and adhere t o t he rules and regulat ions.
Some examples of FIIs are Morgan St anley, Bank of Singapore, Vanguard.
Domest ic Inst it ut ional Invest ors (DII’s) are t he high-value Indian companies t hat invest in t he Indian st ock market t o
earn profit s. T hese businesses may include mut ual funds, hedge funds, insurance companies, and more.
Small Players:-
Small players or traders or investors are the Retail Traders.
Small players generally have a capital of f ew Thousands to f ew Crores.
There are 2 types of Small players. One is Prof essional Traders and another are Novice Traders.
and a setup to trade. Would you like us to call you 

Prof essional Traders are the traders who earn consistently f rom the Market with a proper Strategy, mindset

And Novice Traders are the traders who do not earn consistently and they are on the losing side most of the
time as they don’t have any proper setup to trade.
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Who Exactly Earns from Any Market?

T rading in t he St ock Market is a Z ero-Sum game. Which means one person’s gain is anot her person’s loss.
Z ero-Sum games in daily life include games like poker or chess where one person gains and anot her person loses,
which result s in a z ero-net benefit for every player.
In t he market s and financial inst rument s, fut ures cont ract s and opt ions are Z ero-Sum games as well.
So, the question comes to who exactly

earns from the stock market?
It ’s t he Inst it ut ions and t he Professional T raders who earn from t he market .
And Novice t raders end up on t he losing side.

So, t he t ot al gain of t he Inst it ut ions and t he Professional T raders is t he t ot al loss of Novice T raders as t he St ock
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Market is a Z ero-Sum game.
Let’s understand how these
Institution’s zones
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Supply & Demand Concept:

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Price moves because of Supply and Demand imbalance

Demand: Price t urns higher at price point where Demand exceeds Supply
Supply: Price t urns lower at price point where Supply exceeds Demand
Institutional Supply & Demand Balance

● Price decline due to Institutional Selling which form a Institution’s Selling Zone (Supply
Zone)
The above image shows that the Supply increased when the price came at the Institution’s Selling Zone because of
which the price fell.
● Price rally due to Institutional Buying which form a Institution’s Buying Zone (Demand
Zone)

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The above image shows that the Demand increased when the price came at the Institution’s Buying Zone because of
which the price Rallied.
Components of the Zones
There are 2 components in a Zone:
Leg Candles
Base Candles
Let's understand these components in detail.
Leg Candles
● T hese Candles are FOOT PRINT S of Inst it ut ional Buying or Selling
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● T he Great est imbalance bet ween Supply and you like
Demand us to call
is found at tyou
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he origin of Leg Candles.

● T hese are Expanded Range Candles, when compared t o t he ot her candles on t he chart t hey are visibly much BIGGER
in Siz e.
● Ideally a St rong Leg Candle should be an Expanded Range Candle
● T he Green Leg Candle is called a Rally Candle and t he Red Leg Candle is called a Drop Candle
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Base Candles
T hese Candles Indicat es t hat Supply and Demand is Balanced
T hese Candles Indicat e t hat Orders are Pot ent ially being accumulat ed by t he inst it ut ions.
Ideally it should be Narrow in Range
Base Candles can be of any colour (Red or Green)

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Institution’s Buying Zone Formation
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of Institution’s
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Buying Zones:
➔ Cont inuat ion Pat t ern - RBR (Rally- Base- Rally)
➔ Reversal Pat t ern - DBR (Drop- Base-Rally)
The above images shows Continuation Pattern of Institution’s Buying Zone

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The above images shows Reversal Pattern of Institution’s Buying Zone

Institution’s Selling Zone Formation
There are 2 types of Institution’s Selling Zones:
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➔ Cont inuat ion Pat t ern - DBD (Drop- Base- Drop)
➔ Reversal Pat t ern - RBD (Rally- Base- Drop)
The above images show Continuation Pattern of the Institution’s Selling Zone

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The above images shows Reversal Pattern of Institution’s Selling Zone
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T his form is powered by: St icky Float ing Forms Lit e

(ht t ps://wordpress.org/plugins/st icky-float ing-

Would you like us to call you 

What is a False Breakout?

Would you like us to call you 

There are 7 Rules to Identify a

The above image shows an Invalid Trendline

Would you like us to call you 

The above image shows a Valid Trendline

Would you like us to call you 

Above is an example of a valid Trendline Breakout with Increase in volume

Above is an example of a valid Trendline Breakdown with Increase in volume

Would you like us to call you 

Zone (ht t ps://wordpress.org/plugins/st icky-float ing-

Would you like us to call you 

T his form is powered by: St icky Float ing Forms Lit e

Would you like us to call you 

There are 2 types of Market Players: -

Small players generally have a capital of f ew Thousands to f ew Crores.

and a setup to trade. Would you like us to call you 

We will answer your quest ions

Who Exactly Earns from Any Market?

So, the question comes to who exactly

And Novice t raders end up on t he losing side.

Supply & Demand Concept:

Price moves because of Supply and Demand imbalance

Institutional Supply & Demand Balance

Would you like us to call you 

Components of the Zones

There are 2 components in a Zone:

Let's understand these components in detail.

We will answer your quest ions

Would you like us to call you 

Would you like us to call you 

➔ Reversal Pat t ern - DBR (Drop- Base-Rally)

The above images shows Continuation Pattern of Institution’s Buying Zone

Would you like us to call you 

The above images shows Reversal Pattern of Institution’s Buying Zone

Would you like us to call you 

➔ Cont inuat ion Pat t ern - DBD (Drop- Base- Drop)

➔ Reversal Pat t ern - RBD (Rally- Base- Drop)

Would you like us to call you 

The above images shows Reversal Pattern of Institution’s Selling Zone

Hope you Liked t he Book

For More Such Learnings, Contact us!

Our Programs (https://tradelegend.com/Intraday/)

Disclaimer(ht t ps://t radelegend.com/disclaimer/)

This Website Is Not Affiliated To Facebook Or Google.

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