How to Trade Volume Breakout Stocks Profitably

Many traders ask me how to trade volume breakout stocks profitably. Not all breakouts succeed in the Stock Market. So, how does one get into good breakout stocks? Here’s a thread explaining how I filter out good stocks with reference to RCF that I posted on Twitter on 23rd Nov 2022 (up 12%).

“RCF joining the list of recent PSUs that have been exhibiting strong buying. Its breaking out of Daily-75m timeframe on high volume. To top it all, it has some great Fundamentals: Good Sales and Earnings Growth with a low PEG ratio.”

  1. Ensure that the stock is breaking out simultaneously in 2 timeframes. You choose the timeframes based on whether you are day-trading, swing trading or long-term investing. Ideally use the timeframes separated by a factor of 5 e.g. Daily and 75-min is a good combo for short-term.
  2. Stock should have above average volume for atleast 2 bars when the breakout is happening. Also, make sure that in the base before the breakout, majority green volume bars are above avg vol, while the red volume bars are below avg vol (avg vol is 50-SMA of volume).
  3. Usually the good breakout stocks will always breakout and move fast, so at times it makes sense to enter the stock in mid-market (e.g. RCF). You can capture these stocks by monitoring the Investar scanner during the day or setting custom scan alerts on your watchlist.
  4. But don’t chase a stock if it has already gone up too far. e.g. for a short-term trade, say your SL is 5-7% and Target is 20-25%. Then no point in buying a stock that is 1-2% above the breakout point (which is usually the resistance!
  5. In RCF chart above, the ideal entry would have been 1-2% above 106, so 108, and this breakout happened in the first 75-min on very high volume, so you have to use a good auto-updating screener (like Investar) to capture it in real-time.
  6. Finally good fundamentals can be an icing on the cake (especially for long-term investing). If you look for good Sales and Earnings growth, the chances of the breakout having a good follow-through can increase substantially.

With the nifty50 nearing new highs, many volume breakouts will happen in the next few days. Hope this post will help in identifying the good stocks and avoiding false breakouts. RCF was up 14 points (almost 12% from the breakout point).