Trade Breakouts
by Greg Secker on Mar.09, 2007, under Education
There are 3 types of Breakouts:
- Breakout from resistance
- Breakout from a consolidation
- Breakout to a new high
The Rules: The following are essential –
-
•Sector – only trade in ACTIVE sectors that are PERFORMING
- Fundamentals – loosely applied ( not vitally important)
- Stop loss – set stop loss close to the breakout point (remember you are in for the short term!)
- Check spread – the smaller the better
- Check liquidity – small capitalisation stocks represent greater potential risks
- Risk to reward – check for resistance/support on the long term chart
- Improve – trail your stop up each day, or even intra-daily
- Volume – keep an eye on volume (daily)
Follow the Traders University Stock Selection Strategy:
- Economy – where are we in the economic cycle?
- Markets – what are the overall markets doing?
- Sectors – which sectors historically perform well in this part of the economic cycle? Which of those sectors are currently performing?
- Companies – Analyse the charts of the companies in those sectors that are active and also performing.
- Strategies – Assess those companies for technical setups such as 3 day power plays, etc. While doing this also look for potential breakouts.
Breakout from Resistance:
As a general rule we want to see at least 3 clean touches on the resistance line and no false breakouts
Breakouts from Consolidation
As a general rule we want to see a tight consolidation between two reasonably straight lines
A good increase in volume gives us more confidence in the move
Breakout to new highs
Check for next level of resistance and calculate potential risk to reward ratio.
How do we Enter and Trade Breakouts?
Entering Breakouts – End of Day (EOD)Traders:
- Option 1 – Enter on the day of the breakout by setting an ‘if done’ order to enter the trade just above the resistance line, with a stop loss just below the resistance line. Note : you will not be able to see the current volume or Level 2 therefore you will be subjected to a higher number of falsebreakouts.
- Option2 – Enter on the day after the breakout has occurred. Ensure the breakout day has closed above the resistance line and the volume has increased. If you still wish to enter the trade you will enter just after the open with a stop loss just below the resistance line. Note : this is the safer and more conservative option, but potentially you may have to pass up some breakouts because they would have moved too far by the time you spot them
Entering Breakouts – Intraday Traders:
- Wait for breakout to occur. Check volume and Level 2. Decide whether to enter or not. If you enter, place a stop just below the resistance line.
Trade Management of Breakouts:
- EOD traders – trail stops up at end of each day to the low of the previous day
- Intraday traders – can trail stops at the end of the day to the low of the previous day or trail stops intraday
