During the day, a stock’s price usually moves up and down within a predetermined range. However, normally only 20% of the time a stock will “BREAKOUT” of this range. And, these moves can make an investor VERY wealthy!
What is a Breakout Strategy?
A breakout happens when a stock price moves above or below a defined support or resistance level with increased volume. And, a breakout trader is someone who enters a position after the stock price breaks above resistance or after the stock breaks below support.1
As mentioned above, most of the day, stocks bounce around inside of a predetermined “Range”. And, it is when a stocks price “breaks” above or below its Range great profits can be made.
That is why establishing your stocks “Range” is so important.
To establish the stocks range, first let the 15 minute candlestick form. Then, place your support and resistance lines on the top and bottom of the 15 minute candlestick body.
The illustration below shows the days prior close followed by the FIRST 15 minute Candlestick.
After the 15 minute candlestick has formed, you draw your support and resistance lines — This will give you the stocks “Range”.
Then switch to the Five minute chart to watch for buy signals.
Finding the Buy Signal in a 5 Minute Breakout Strategy
First, we have our Support & Resistance Lines (drawn on the 15 minute chart). Now we have an “expected” range the stock SHOULD trade in for the day. And, with this information we can begin creating our 5 Minute Breakout Strategy!
As you can see in this example, Party City moved inside the stocks Support and Resistance most of the day.
And, now we wait to see if your stock will either break below the Support Line.
Or rather, it will break above the Resistance Line.
Entry points are fairly black and white when it comes to establishing positions on a breakout. Once prices are set to close above a resistance level, an investor will establish a bullish position. When prices are set to close below a support level, an investor will take on a bearish position.2
Follow These Two Breakout Strategy Rules
There are two main rules you need to follow for a breakout strategy to work for you:
- Be sure to set a Stop Loss;
- And, learn how to establish your exit.
What Is a Stop-Loss Order?
A Stop-Loss is an order placed with a broker to buy or sell once the security reaches a particular price. The purpose of the Stop Loss is to help ensure that in the event your stock falls, your losses will be limited.
How a Stop Loss Works
IF you are wrong about the direction of the stock you have bought, then the Stop Loss will help limit your losses.
Setting a stop-loss order for 10% below the price at which you bought the stock will limit your loss to 10%. For example, let’s say you just purchased Microsoft (Nasdaq: MSFT) at $20 per share. Right after buying the stock you enter a stop-loss order for $18. If the stock falls below $18, your shares will then be sold at the prevailing market price.
so the rule is simple….