The truth is, most traders don’t trade breakouts. Many try and fail because of failed breakouts. You’ll hear it many times amongst many traders that “BREAKOUTS TEND TO FAIL OFTEN”. While this may be true across all stocks traded in the markets, this is not true for stocks that meet the conditions below. So the case goes without further investigation and most traders use other systems to make money in the market. At the same time, you must keep in mind that breakouts provide the largest trend movements, and the biggest gains. Traders like Jesse Livermore and the Turtle Traders make their millions trading breakouts to catch large trends in the market. So what is the solution to breakout failure? The following rules and conditions below will filter the market down to only stocks that will have a high rate of successful breakout trades.
Trade only In a Bull Market
Make sure that the markets as a whole, and the sector you are trading are in a bullish mode. Watch the stock market indexes, and ETF’s for different sectors you are trading. Apply technical analysis using 50day/ 200 day moving average and use trendlines to determine what phase the market is in.
Trade only in the Hottest Sectors
It’s been proven that the leading stocks are found in the hottest or bullish sectors of the market. Finding the hottest sectors is a little evasive, but there are a few sources you can go to. Watching the news might give you hint, as they mention whether it be the tech sector or financial sector that is bullish in a given period of time. You can also look up what type of stock have gained the most in the last 6-12 months. Simply doing a google search can lead you to some good resources. You can also look at heat maps at BarChart.com to give you a more precise idea of what sectors are leading currently.
Trade only the Healthiest of Stocks
There is a tendency for the big money to flow into stocks that are showing signs of good health. This is often referred to as “growth”, when company is experiencing positive earnings in their financial situation. In layman’s terms, they are making money, expanding business, coming out with new products etc. This growth is reflected in their financial statements. You can learn how to find growth stocks by hand, and determine what your options are. There are also stock reports you can purchase online.
Trade Stocks with Healthy Average Volume
The average volume of shares being traded in stocks is often overlooked. This is a big deal, so listen up. Trade only stocks with MORE THAN 1million shares traded in volume. Stocks trading under 1million shares on average have liquidity issues, big volatility, and choppy action. Penny stocks for instance tend to shoot up 100% or more in a single session. Often times small volume stocks breakout and exhaust itself in a single trading session. They also may gap to it’s peak run and come down there after. You want to stay away from stocks with less than 1million shares in average trading volume.