BPOI - FAST TRACK TRADING ACADEMY
BUYING THE BREAKOUT
What Is a Breakout?
A breakout is a stock price moving outside a defined support or resistance level with increased volume. A breakout trader enters a long position after the stock price breaks above resistance or enters a short position after the stock breaks below support. Once the stock trades beyond the price barrier, volatility tends to increase and prices usually trend in the breakout's direction. The reason breakouts are such an important trading strategy is because these setups are the starting point for future volatility increases, large price swings and, in many circumstances, major price trends.
Breakouts occur in all types of market environments. Typically, the most explosive price movements are a result of channel breakouts and price pattern breakouts such as triangles, flags, or head and shoulders patterns. As volatility contracts during these time frames, it will typically expand after prices move beyond the identified ranges.
Regardless of the timeframe, breakout trading is a great strategy. Whether you use intraday, daily, or weekly charts, the concepts are universal. You can apply this strategy to day trading, swing trading, or any style of trading.
Finding a Good Candidate
When trading breakouts, it is important to consider the underlying stock's support and resistance levels. The more times a stock price has touched these areas, the more valid these levels are and the more important they become. At the same time, the longer these support and resistance levels have been in play, the better the outcome when the stock price finally breaks out.
As prices consolidate, various price patterns will occur on the price chart. Formations such as channels, triangles, and flags are valuable vehicles when looking for stocks to trade. Aside from patterns, consistency and the length of time a stock price has adhered to its support or resistance levels are important factors to consider when finding a good candidate to trade.
Entry Points
After finding a good instrument to trade, it is time to plan the trade. The easiest consideration is the entry point. Entry points are fairly black and white when it comes to establishing positions on a breakout. Once prices are set to close above a resistance level, an investor will establish a bullish position. When prices are set to close below a support level, an investor will take on a bearish position.
o determine the difference between a breakout and a fakeout, wait for confirmation. For example, fakeouts occur when prices open beyond a support or resistance level, but by the end of the day, they wind up moving back within a prior trading range. If an investor acts too quickly or without confirmation, there is no guarantee that prices will continue into new territory. Many investors look for above-average volume as confirmation or wait toward the close of a trading period to determine whether prices will sustain the levels they've broken out of.
Where to Exit With a Loss
It is important to know when a trade has failed. Breakout trading offers this insight in a fairly clear manner. After a breakout, old resistance levels should act as new support and old support levels should act as new resistance. This is an important consideration because it is an objective way to determine when a trade has failed and an easy way to determine where to set your stop-loss order. After a position has been taken, use the old support or resistance level as a line in the sand to close out a losing trade.
Summary
In summary, here are the steps to follow when trading breakouts:
Identify the Candidate: Find stocks that have built strong support or resistance levels and watch them. Remember, the stronger the support or resistance, the better the outcome. Make sure you understand this when you shop for stocks.
Wait for the Breakout: Finding a good candidate does not mean a trade should be taken prematurely. Wait patiently for the stock price to make its move. To be sure the breakout will hold, on the day the stock price trades outside its support or resistance level, wait until near the end of the trading day to make your move.
Set a Reasonable Objective: If you are going to take a trade, set an expectation of where it is going. If you don't, you won't know where to exit the trade. This can be done by calculating an average move the stock makes or measuring the distance between support and resistance (especially when trading price patterns).
Allow the Stock to Retest: This is the most critical step. When a stock price breaks a resistance level, old resistance becomes new support. When a stock breaks a support level, old support becomes new resistance. In the majority of your trades, the stock will test the level it has broken after the first couple of days. Prepare for it.
Know When Your Trade/Pattern Has Failed: When the stock attempts to retest a prior support or resistance level and it breaks back through it, this is where a pattern or breakout has failed. It is imperative you take the loss at this point. Don't gamble with your losses.
Exit Trades Toward the Market Close: You can't discern at the open whether prices will hold at a particular level. This is why you might consider waiting until near the market close to exit a losing trade. If a stock has remained outside a predetermined support or resistance level toward the market close, it is time to close the position and move on to the next.
Be Patient: This strategy requires plenty of patience. By following these steps, you will reduce emotion and be more objective about a trade.
Exit at Your Target: If you are not exiting the trade with a loss, then you are in the trade. You should remain in the trade until the stock price reaches its objective or you reach your time target without hitting your target price.
WATCH US CARRY OUT A SIMPLE TA
