WHAT ARE BREAKOUTS IN STOCKS
In general, a breakout is when the price of a stock goes beyond the specified support or resistance level. Identifying and trading the possible breakout stocks will give an upper hand in earning more profits. Particularly, breakout takes place in various types of market environments.
Occurring of a breakout signal generally indicates the success of the buyers in pushing the stock price above the resistance level. On the contrary, a negative breakout indicates that the buyers pushed it below support level. Most of the big price movements have various breakouts, specifically beginning with the first breakout. You have to identify the patterns for analyzing breakout stocks. Let’s discuss some of the ways to identify several breakout stocks.
BOLLINGER BAND BREAKOUT
Bollinger band is a technical indicator in trading which can also help in identifying breakout stocks. This band moves along with the price in the candlestick chart, significantly forming an envelope. Consequently, the price often stays on the inside of the band. If the price creates bigger movements, bands will stay wide aside. If the price moves fixedly, the bands will shrink. Bigger price movements with a successive breakout often happens after a quiet period.
CUP AND HANDLE BREAKOUT
Cup and Handle is one of the most common pattern generation. This happens when a price drops highly from a point and slowly get back to that point. The dropping and the gradual recovery forms a cup on the chart. We will know the price movement is decreasing when the price swings become smaller. You can see the handle of the cup by drawing trendlines on the highs and lows of the price swings. You can consider buying when the price goes above the higher trendline of the cup.
Trading with a breakout stock is not a very easy task. One section of a strong strategy includes the entry. To control the primary risks, a stop-loss is needed. You must also have an exit point in case the trade go profitable. Contrasting to long-term traders, breakout traders secure profits periodically. Calculating the risk/reward ratio will help in understanding the state of the trade as if its worth it or not. You must be careful about the entry, exit and stop-loss methods before placing a trade.
Sometimes, you could miss the first breakout. For example, a stock went over the resistance level several times and it broke, but you didn’t notice it instantly. Mostly, a second chance is available when the price drops back to retest the breakout area. Once the price goes up, you can enter close to the retest area. Pullback strategy usually doesn’t own a profit target. But, some traders use ‘three times the risk or more’ as a target to exit.
HIGH VOLUME STOCKS
Increased volume above average levels indicate a good sign in breakouts. It ensures that the trend is expected to keep going in the direction of breakout. Lower volume indicates that less people are concerned about buying the stock after the breakout point. Therefore, it is less likely for the stock to go higher. Read more about the importance of volume in confirming price breakouts.
Never believe that all breakouts could end in profits. A false breakout could also happen, which means the price could go the other way. It is very essential to keep a stop-loss for every trade. This could help in controlling the risks and losses. Knowing when to exit with profit is also crucial. Combining several strategies together could help in creating more profits from breakouts.