Breakout Stocks: Seven Important Steps to Take Before Trading Powerful Breakout Stocks
How many of you have watched business channels or listened to experts declare that a stock recently broke out from specified levels and is poised to make large swings either up or down?
If you keep up with the stock market, we are certain that you have already heard this a number of times. You may have heard of “breakout stocks,” but are you familiar with how to trade with them?
Well, aggressive investors who desire to take a position during a trend’s early phases utilise a trading strategy known as “breakout trading.” If it is handled correctly, this method may hint to the beginning of big price changes and an increase in volatility, and it can also provide low downside risk if it is taken advantage of.
In light of this, let’s talk about the seven measures that you should do while trading breakout stocks in today’s blog:
What exactly are Breakout Stocks all about?
Shares are considered to have had a breakout when they rise over either their support or resistance level. Breakouts, an important concept in technical analysis, may serve as an early warning sign that a stock is getting ready to make a significant move.
Therefore, if a stock price is able to go over its resistance level, it will often continue to make a prolonged upward climb. If it breaks through the level that it has been supporting, then it might go on a downward trend.
It is common practise to regard support and resistance levels to be “stronger” if a security has struck them more than once. Therefore, shares of stock that break through these supposedly “stronger” levels often exhibit considerable price movement.
Not only can stock prices sometimes breach support and resistance levels, but other assets do so as well. Breakouts from essential support and resistance levels are possible for all types of financial assets, including commodities, foreign exchange, and cryptocurrencies.
When trading breakout stocks, what are the steps that need to be followed?
When trading breakout stocks, the following seven steps are some good guidelines to follow:
Determine the Stock that Has the Potential to Breakout
Finding equities that have strong support or resistance levels and keeping an eye on such stocks should be a priority for investors. It is important to keep in mind that the move that results from a breakout will be more powerful the stronger the support and resistance levels are.
We can determine how robust the resistance level is by looking at the chart of Polycab India Ltd. below. The prices have come close to touching that level two or three times.
Stay Patient and Await the Breakout
Finding a good stock does not automatically guarantee that a transaction can be made before the stock breaks out of its trading range. Instead, one should be patient and wait for the stock price to move before making any moves.
Once the breakout happens on the day that the stock price trades beyond its support or resistance level, one should wait until the closing price to take up the trade in order to be certain that the breakout will hold. The following example demonstrates how this should be done:
Determine an Objective for Breakout Stocks That Is Realistic
If you want to trade the breakout stock, you should first determine your expectations for where the stock will go, particularly if you plan to trade using chart patterns. If you don’t set, you won’t be able to figure out when and where to get out of the deal.
In the following illustration, the price target may be determined by computing the distance between the top of the head and the bottom of the neckline in the head and shoulders pattern, as shown below:
An example of the Head and Shoulders pattern Escorts Ltd.
Give the Stock an Opportunity to Retest
Taking this step is the single most critical thing you can do when trading breakthrough equities.
Therefore, when the price of a stock breaks through a level of resistance, the level that was previously resistance becomes the new support. When a stock price breaks through a support level, the previous support level transforms into new resistance, as demonstrated in the following table:
After a breakout, the majority of the time the stock will re-test the previous level that it had previously broken over, and traders should be ready for this eventuality.
Recognize when your strategy or pattern has been unsuccessful.
If a previously tested support or resistance level is retested by the stock and broken through again, this indicates that a pattern or breakout attempt has been unsuccessful. You are required to accept the loss at this level. Keep in mind that one should never gamble with the money they have lost!
When the market is nearing its close, exit any open positions.
At market open, it is impossible to tell if prices will remain stable at a certain level. Because of this, most traders think it is best to wait until the very last few minutes before the market closes to get out of a lost deal. If a stock has continued to trade outside of a previously established support or resistance level as the market draws to a close, it is time to exit the position and look for another opportunity.
Get Out When You Achieve Your Goal
This indicates that you are still participating in the transaction since you are not getting out of it. It is important to hold on to a transaction until the price of the stock approaches its aim or time target without really reaching the target price.
Webinars Focusing on an Exit Strategy
The following webinars will provide you with further information on breakout strategies:
- Piyush Chaudhry’s Compression Breakout Strategy (see References)
The goal of this webinar, which will be led by Piyush Chaudhry and titled “Compression Breakout Strategy,” is to assist traders in locating swing setups with a high possibility of success. When it comes to timing your entries and exits, having a solid understanding of the underlying volatility is very necessary.
How to Profit from Failed Breakouts, written by Ankit Chaudhary
Breakouts often take place along trend lines that have been identified as resistance or support. A price is said to have had a failed breakout when it passes through a level of support or resistance but does not have sufficient momentum to sustain its direction after the move.
A breakout trader is someone who initiates a trade as soon as the price breaks out from a pattern. This is the worst-case situation for a breakout trader. Learn how to make a profit out of failed breakouts by participating in the webinar presented by Ankit Chaudhary.
Deepak Thakran’s “Multi Timeframe Analysis & Identifying Failed Breakouts”
During this webinar on “Multi Timeframe Analysis & Identifying Failed Breakouts” hosted by Deepak Thakran, we will go through some of the most important considerations that need to be made prior to engaging in a counter-trend trade. An essential component of this endeavour is the multi temporal analysis.
Discovering Breakout stocks with the help of StockEdge Edge Reports
Additionally, the list of breakout stocks that can be found in the Edge Reports may be found as follows:
Additionally, you may see the video on Breakout Stocks that was made by Mr. Vivek Bajaj.
It is important to keep in mind that stock breakouts take place when the share price of a firm advances beyond a region that has served as support or resistance, as was covered before. They are mostly used as an indicator that a new trend is about to arise.
We hope that you found this blog to be interesting and that you will apply its lessons to the fullest extent possible in the real world. Share this blog with your loved ones and assist us in achieving our goal of increasing people’s awareness of the need of sound financial management by showing some love.