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Every trading underlying has a trading range at any day. In other words, on any given day, the trading
underlying will move between two prices (high and low). Our main strategy should be to trade the underlying
when it is about to start its biggest move for intraday (May it be upside or downside). To explain this, let us take
a very simple example
Example 1: The stock ABC is trading at 100 at any point of time during the day. In another half hour it
starts its sharp upward movement and creates new high. Our main strategy should be to catch a part of that
sharp move (we cannot take the benefit of entire sharp upward movement or downward movement. And this is
what we try to do with breakout method. We try to take benefit from a small part of sharp upward movement or
downward movement.
If you look at the above image, you will find two important lines. (Upside Breakout and Downside Breakout).
What this line means to us is, if price moves above upside breakout, we will buy the underlying (long) and if
the price moves below downside breakout, we will sell the underlying (short).
As you can see, when price moved above upside breakout, it went more up and made a new high.
Note: This system should be used till 2 pm (or 1 and half hour before market closes. Because there is
no point finding breakouts in last minutes of trading session)
Example 2: When the current day’s range is between MF1 and MF2.
Let us take an example of HDFC for 13th Apr 2010.
Its previous day high/low = 2856.50 / 2791.20.
Range = 2856.60-2791.20 = 65.3.
MF1 = 0.45 * range = 29.385.
MF2 = 0.75 * range = 48.975.
Current day’s high and low at 9:30 am was 2834 / 2797.
Range = 2834 – 2797 = 37.
So current day’s range 37 is between MF1 and MF2.
As seen in below diagram, sell triggered below Lower breakout and target got achieved.