Monday, April 7, 2008

Breakout trading

Break out trading really can be one of the most profitable ways of trading. Traders have made millions thru breakouts. . It’s easy to do too; this is a step by step procedure that successful breakout traders do.
1. Find an uptrend. The First thing a trader must do is to find an uptrend. This is simply a stock that is making higher highs and higher lows. This is very important; you must trade with the trend of a given stock.
2. Most of these stocks will hit a top. Up trending stocks will often hit a resistance level. This is a level at which the stock hit and came down. For instance if a stock hits $80 and comes down that would be its resistance level.
Sometimes an up trending stock will get stuck between 2 levels. For instance let’s say after the stock hit $80 and came down it hit $75 and came up. Then the stock bounced back and forth between $75 and $80. This is called consolidation.
3. After you find an up trending stock that has hit resistance you wait. It will most likely break resistance at some point. When it does it is giving us a signal that this stock is going to new highs. A person who trades breakout would buy it at the break. The old resistance of $80 now becomes support.
4. After you buy it you would want to place a stop under the old resistance level just in case it comes down. You wait for the stock to move up. When it moves up you raise your stop. For example if the stock moves to $90 you might want to place your stop at $86. Eventually the stock will come down and you will get stopped out. The difference between what you bought the stock for and what you got stop out at is your profit.
5. The only tricky part about trading breakouts is deciding where to place the stop when the stock moves higher. There are many different approaches to this. Some traders will have a trailing stop so that the stop is always a certain percentage under the stock. Some traders like to manually set a stop.
Everyone is unique make sure you paper trade to find out what works best for you.

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