Samco's Nilesh Sharma explains how options B.R.O enhances trading strategies using sensex index charts

A lesser-known yet effective technique in index trading using the Sensex index charts is to look for fake breakouts or breakdowns. These false signals can trap unsuspecting traders, but for those who learn how to spot them, they present significant opportunities.”

Sharma also tells us how to combine breakouts and breakdowns with RSI divergence analysis and candlestick confirmation, and explains how Options B.R.O. can elevate this strategy to make options trading potentially more profitable.

Understanding Fake Breakouts and Breakdowns on Sensex Index Charts

A price breakout occurs when the Sensex price makes a high, pulls back and then comes back up to break that high. It then continues to move upward successfully. However, in this strategy, traders focus on identifying fake breakouts rather than actual breakouts.

A fake breakout happens when the Sensex value makes a high, dips a little and then moves back up to break the previous high. Then, instead of continuing to move upward, it starts declining again. This false signal on a Sensex index chart can confuse traders who expected a continued bullish move.

To identify these fake breakouts, traders must carefully observe the price action on the Sensex index chart. They should particularly pay attention to how the price behaves after it breaks a previous high. If it quickly reverses and starts declining, it may likely be a fake breakout.

This concept similarly applies to breakdowns, where the price movement is downward instead of upward. A fake breakdown occurs when the price breaks below a previous low but fails to continue its downward movement, reversing upward instead. Recognising these false signals is crucial for traders using Sensex index charts as it lays the groundwork for more advanced strategies.

A Step-by-Step Guide to Trading Fake Breakouts (or Breakdowns)

To effectively trade a false breakout or breakdown spotted on a Sensex index chart, traders require a multi-step strategy that combines technical indicators and candlestick patterns. This approach helps identify and confirm trading opportunities while simultaneously minimizing the risks associated with fake breakouts or breakdowns.

The first step is to identify key support or resistance levels on the Sensex index chart. These levels act as barriers where price movements may stall or reverse. Traders can rely on historical price data, trendlines and moving averages to pinpoint these crucial levels. Then, when the Sensex approaches a support or resistance level, traders must look for signs of a potential breakout or breakdown. For bullish setups, it is essential to watch for fake breakdowns where the Sensex makes a low, bounces back, breaks that low and then reverses upward. For bearish setups, the opposite is required — meaning that traders must watch for fake breakouts where the price reverses down after a high, then breaks that high but falls once more.

The second step is to look for RSI divergence. In bullish scenarios, traders should look for a positive RSI divergence where the index makes lower lows but the RSI makes higher lows. For bearish scenarios, traders should check if the RSI divergence is negative — where the index makes higher highs but the RSI makes lower highs. A positive RSI divergence indicates that the index value may rise, while a negative divergence indicates that the index value may fall.

The third and most important step is to confirm the findings using candlestick charts. For a bullish trade, patterns that indicate potential upward price movements — like the morning star, three white soldiers or bullish engulfing pattern — are significant. For a bearish trade, patterns that signal a falling market — like the evening star, three black crows or bearish engulfing pattern — offer confirmation.

By following these steps, traders can identify whether to take long or short positions in the market, set their entry price, stop-loss limit and target price accordingly and execute their trading plan.

Beyond the Spot Market: Using Fake Breakouts and Breakdowns in the Options Market

While this strategy can be useful for trading in the spot market, it can also be applied to options trading. By identifying a fake breakout and confirming the same with RSI divergence and candlestick patterns, traders can conclude that the index may make a bearish move.

Similarly, by identifying and confirming a fake breakdown, traders can adjust their market view to include a possible bullish move from the index. Based on how they expect the index value to change, an options trading strategy can be formulated and implemented. However, it is not always as easy as buying a put or a call option. Effective options strategies often involve multiple legs that result in inbuilt hedging. To create these strategies, traders must factor in the time decay, implied volatility, options Greeks, risk-reward ratio and more.

False Breakout/Breakdown Trading Simplified with Options B.R.O

It can be challenging to manually implement complex strategies using fake breakouts and breakdowns identified on Sensex index charts. However, Samco Securities has an effective solution for this issue. Samco’s Options B.R.O, an advanced options strategy builder, simplifies the process greatly. Nilesh Sharma tells us how.

“When traders identify a potential fake breakdown or breakout, it helps decide whether the market is likely to move upward or downward. They can then submit this market outlook along with other essential details in Options B.R.O. in the Samco trading app. Our advanced strategy builder then analyzes thousands of strategies and contracts, evaluates several metrics like liquidity, options Greeks, risk and reward and more to suggest optimal strategies for that trade.”

This is a revolutionary step forward in the realm of options trading because Samco’s Options B.R.O. is equipped with the ability to process vast volumes of data accurately within seconds — something that is manually impossible. The tool from Samco Securities then offers tailored recommendations for each trader based on their scrip choice, target price, risk preferences and market view, making it easier to use the raw data from Sensex index charts gainfully in the options market.

About SAMCO Securities

SAMCO Securities was incorporated by Mr Jimeet Modi, Founder & CEO of SAMCO Group in 2015. As the country’s leading flat-fee brokerage and wealth-tech platform, SAMCO Securities provides retail investors access to sophisticated financial technology and makes their wealth-creation journey simple, informed, and cost-effective. SAMCO Securities' mission is to eliminate the existing challenges faced by traders and investors and democratise access to the wealth management process for every Indian. With customer centricity at SAMCO’s core, we implement a quantitative approach to provide differentiated solutions that empower our customers in acing the capital markets.

SAMCO Securities is pioneering the stock market trading by introducing industry-first features like My Trade Story, Personal Index and Trade Spread Sheet to name a few under its CRP strategy.

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