Here is a simple breakout trading strategy that anyone even young kids can easily spot. Trading should be so simple that when you look at a setup, it is very clear that the stock is about to breakout. Gone are the days when you need indicators that cross here and cross there and zig and zags that confuses everyone except the creator of the indicator. I have found that the best trading strategies are the ones that is so simple that you won't even make a mistake of spotting the stock.
In order to be able to profit from this breakout trading strategy, we need to know what is a breakout.
This means that the stock has been resting for a long time. When a stock trades sideways for a long time, it means that the price did not move that much. The public often gets bored with a stock that has traded sideways for awhile. It is during this time that the stock is not in the radar of the public, the professionals will be on the lookout for this stock and get ready to buy it when it breaks out.
It is only after a stock has broken out of the consolidation for a few days and shoots very high that the public starts to chase this stock. A stock that breaks out have the potential to move higher very fast. So, it is a very good trading strategy that you can use to profit from the market.
This is what a breakout trading strategy setup looks like. First of all, the stock is already in an uptrend. It is moving higher and then it stops for a period of time to rest. A stock is said to be resting when it is trading sideways in a tight range. The consolidation period is not erratic but the stock moves sideways in an orderly fashion.
This tells us that the stock is not in any danger of a selloff. People are not buying it but the holders of the stock are certainly not selling the stock. There will come a time when the stock will stop trading sideways. The stock will either move up or move down. Since the stock is already in an uptrend, the bias for the breakout will be to the upside. The trader then buys the stock the moment it breaks above the highs of the consolidation.
In order to ensure that the breakout candidate is successful, we need to lay down certain guidelines and criterias that will keep our stock selection perfect. There are thousands of stocks out there in the world and each offers the traders many many different type of opportunities. Some people like to bottom fish because it sounds smart to be able to buy something at the lowest price possible.
It is human psychology to be proud and happy buying stuff very cheap. We can brag about getting a computer 10% cheaper than what our friends paid for. Therefore, if we can buy a stock for a very very low price, we are even happier. But the breakout trading strategy is not to buy low and sell high.
The breakout trading strategy needs you to be brave, to venture out to new frontier and be the pioneer.
Take for example, the stock has been trading sideways at the price of $20 to $21 for a month. When it breaks out above $21, we buy the stock. When the stock reaches $25, we sell the stock for a $4 profit. We bought high at the price of $21 and sold it at $25. This trading strategy does not make sense to many people but it is one of the secret ways that market professionals use to make money in the stock market. This trading strategy has been met with such success but it still confuses and confound people.
The trading criteria for breakout trading strategy is this:
The best way to learn how to play breakout trading strategy is to observe stocks that have experienced a breakout and see how they look like before taking off. There is a lot of history that keeps repeating itself in the stock market. What have happened 100 years ago will happen today again and again. It will continue to happen in the next 100 years.
In the chart above, we can see how AMZN formed a very beautiful and nice daily breakout pattern. The stock was above its rising 20 MA (most of the time), above its rising 50 MA and rising 200 MA. When a stock is above all three moving average that are rising, it is a picture of strength. As the stock moved sideways for a few weeks, it was actually resting before a take off. Stocks tend to jump higher when it is allowed to consolidate awhile. The consolidation or sideways movement is important because it gives the stock a rest to gain energy to move higher.
The trader can buy AMZN the moment it trades above the consolidation. Notice how AMZN just shot higher the moment it breaks above the consolidation. The trader can put a stop at the low of the consolidation. Stop losses are important because nobody is correct all the time. The most perfect setups can go wrong. Therefore, we put a stop loss to limit the risk that we encounter.
Alibaba which is Jack Ma's company is another great example of breakout plays. At one point or another in a stock's existence, it will always give traders an opportunity to play a breakout trading strategy in the stock. The first hint of a nice breakout play is when BABA made a bullish 20 cross 50 MA. This is a signal of bullish strength. Then the stock consolidated for awhile. This allowed the stock to take a rest before flying higher.
We can draw a box pattern over the consolidation area. Once the stock breaks above the box, we can buy it. Then we put a stop loss below and ride the stock higher. Just look at the superb gains that this stock gave traders who played the breakout strategy.
JD com is another Chinese stock that gave traders a very nice breakout setup. From March 2017 to April 2017 the stock consolidated sideways. Once again we can draw a box pattern and once the stock breaks out of the box, we just buy it and put a stop at the low of the box.
Agilent Technologies is another example of how a breakout can be super nice for traders. Although this stock traded sideways for awhile after it broke out, it still gave traders a nice bull run trade. The mechanics of a breakout trade is quite simple. Just buy it when it trades above the box and put a stop below.
This trading strategy is not for the faint heart. As human beings, we have always been conditioned to think of buying low and selling high. We always want to look smart to buy the stock when it falls and then reap the profits once it bounces back up. With a breakout trading strategy we are always looking to buy high and sell even higher.
This goes against the ingrained habit that is in us. If a stock has gone from $5 to $10 we are afraid of buying a stock that is at $10. After it consolidates awhile, the stock breaks out and shoots up to $15. It takes a lot of courage to buy the stock at $10 and then have the patience to see it move to $15. With this breakout trading strategy, you can do it and take profits out of the market consistently.
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