If you are an up-and-coming retail trader looking for a trading strategy to hone your skills, trading breakout stocks is best. You don’t need to be the next Gordan Gecko or Warren Buffet to trade breakout stocks, but if you want to be someday counted amongst them, this is an excellent way to start.
This article will give you steps to follow when trading breakout stocks, so why delay? Combine this with keeping daily stock updates, and you’ll be a savvy investor in no time. Read on because destiny awaits!
What are Breakout Stocks?
Breakout stocks are shares whose price moves beyond their support or resistance levels and a high trade volume. Breakouts are an indication that the stock is about to make a drastic shift.
If a stock moves beyond its resistance level, it will usually continue to make an upward move, while if the stock moves past its support level, it may cause a significant downward movement.
If the support or resistance level is ‘strong,’ i.e., the stocks hit those levels multiple times, then the stock may go on extended moves once it breaks through.
Why are Breakout Stocks Important?
Breakouts give investors an indication that the stock is about to make significant moves before they begin to do so in earnest. This allows traders to enter earlier. A breakout is usually followed by price action and volatility, making it the perfect storm for investors looking to profit.
The concept behind breakouts is quite simple. Investors won’t be willing to enter if a stock approaches a specific price multiple times but always retraces as there is little chance of making returns.
However, if the stock does surpass that certain price point, it becomes a signal for investors to take a long position, while investors with a short place will see it as an indication to cut their losses. This creates an atmosphere of high demand for the stock, which can cause the price to leap and potentially lead to a new sustained trend.
Steps to Follow When Trading Breakout Stocks
Again, trading breakout stocks is a great and relatively safe trading strategy, but you must be diligent and disciplined to succeed. The following steps will guide you on what to do when trading a breakout.
Find the Right Stock
Find and keep track of stocks that have built strong support and resistance levels. The stronger these levels, the better the potential outcome can be. Be sure to have a clear idea about this when choosing to invest in a stock.
Waiting for the Breakout
You may be tempted to take a position as soon as you find the right candidate, but patience is the key to making a successful breakout trade. You must confirm that the breakout will hold before investing.
Thus, when you see that the price has moved beyond the support or resistance levels for most of the trading day, take a position right before trading closes.
Set an Achievable Goal
It is always a good idea to set expectations of where the stock will go. If you don’t do so, you might find it challenging to identify the right time to exit the trade. You can do this by either calculating the stock’s average move or measuring the distance of the points between its resistance and support levels.
Let the Stock Retest
One of the most crucial steps is to allow the stock to retest. The old resistance becomes the new support, or when the stock breaks a support level, the old support becomes the new resistance.
In most cases, the stock will test the level it has broken a few times over the next few days, and you must be prepared for it.
Know When to Cut Losses
This is where your discipline comes into play. The breakout fails when the stock attempts to retest a previous support or resistance level and breaks back through it. You must accept this as a loss and close your position immediately.
Exit Trades Towards Closing Time When Facing a Loss
It is difficult to determine whether prices will hold at the start of the trading period. It would be best to consider waiting until close to the end of the day’s trading before closing a position.
If a stock has remained outside of your targeted support or resistance level during the closing, it’s best to close your position and move on.
Exit at Your Target
Be patient and wait until the price hits your predetermined target or until it reaches your time target before closing your position.
Breakout trading is essentially riding the volatility of an asset, and with volatility, there is always the chance that the breakout may be a fakeout, and you may incur losses. However, if you follow the steps mentioned in this article, you can create a winning trading plan.
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