Breakout Trading

Before we discuss breakout trading we must first define what a “breakout” is. A “breakout” is a stock price that moves beyond the defined support and/or resistance levels and it does so with increased volume. Day traders and other stock traders will use this form of trading as a way to take a position within a trend’s earlier stages in a way that offers limited downside risk.

Traders using this method will enter a long position after the stock price breaks above the resistance level. Conversely, traders will enter into a short position after the stock breaks below the support level. Investors find that breakouts are the markers for major price trends.

In today’s article we discuss the steps that traders must take when breakout trading.

  1. Look for those stocks that have strong support or resistance levels. Watch how they move keeping in mind that the stronger the levels the better the ending result.
  2. Be patient and wait until the end of the trading day on the day that the stock price breaks out. Don’t act too soon and miss out on the trade’s full potential.
  3. Know your exit strategy when trading stock . Determine your point of exit and act on it when the time comes. This is true for all types of trading no matter the strategy. This strategy may ride on the fact that your pattern has failed or if your target is reached. Regardless, you must have your exit and entry points defined, and you must follow them.
  4. As a stock price breaks a support level, the old support level becomes the new resistance level and vice versa. (old support becomes the new resistance) Make sure that the stock will test the level it broke after the first two days. This is a very important step and one that should not be skipped by stock investors .
  5. Accept your losses if trades fail when breakout trading. After completing step four described above, you may realize that the breakout failed. You won’t win every time so take it as a learning experience.
  6. Investors will often wait until market close to exit a losing trade. If you notice that the stock has stayed outside the support and resistance levels at the end of the trading day, you may want to close out of the position. There will be more opportunities in the future.
  7. Have patience so that you avoid emotional investing. Follow your entry and exit strategies, accept losses, and trade objectively.

In addition to breakout trading, please also read about Japanese Candlesticks which is a trading strategy used by some of the world’s most successful traders along with other forms of technical analysis . Once you are comfortable with the major candlestick signals, expand your expertise by learning the secondary Candlestick Patterns . Combine these with your favorite technical indicators , such as the moving average , and you have the perfect trading arsenal for trading stocks, currencies, commodities, or exchange traded funds .