Do you want to make money in the stock market? Learn to recognize stocks that are breaking out, and you are well on your way! In this post, we’ll explore why investing in stocks at the moment they break out of their bases can dramatically increase your chances of success and reduce your risks.
Understanding Breakouts
Do you know what really grabs my attention in the stock market? A good breakout. A breakout happens when a stock moves beyond a defined resistance level with significant volume. Why should this matter to you? It signals that the stock might continue its upward trend, presenting a potentially lucrative investment opportunity.
And what do I look for in a breakout? It’s not just about the price exceeding a certain point; it’s about the volume and momentum behind it. This combination often indicates a strong buyer interest, which could propel the stock even higher.
Timing Your Investment
Timing in the stock market can feel like trying to jump onto a moving train. When is the exact right moment to invest in a breaking out stock? Right as it passes its resistance level with noticeable volume. This ensures you’re not catching a false signal.
And guess what comes next? You’ll need to keep an eye on technical indicators. But don’t worry, I’ll guide you through which ones can help confirm a breakout is worth your investment. Stay tuned, as that’s coming up later.
Case Studies of Successful Breakouts
And here’s a slice of practical insight. Let me walk you through my personal experiences where spotting the breakout signals paid off handsomely.
Take the SAP example on the chart:
- First Breakout in November 2023: SAP surged past its resistance level, and guess what? It wasn’t just a fluke. The volume backed up the move, signaling a strong buy.
- Second Breakout in late January 2024: Once again, SAP didn’t disappoint. Breaking out with conviction, the stock showed another round of strong performance, proving the previous wasn’t a one-hit wonder.
Why does this matter? These real-life instances give you more than theory; they give you a tangible grasp of the rewards that come with mastering the art of breakout trading. And with this in mind, let’s now pivot to the pitfalls you should dodge to keep your trading game strong.
Common Pitfalls to Avoid
And here’s a critical piece of advice: not all that glitters is gold. Sometimes what looks like a breakout is just noise. How can you tell the difference? It’s all about discernment and not rushing into decisions based on excitement alone.
What are some common mistakes to watch out for?
- Jumping in without enough volume to support the breakout.
- Ignoring broader market conditions that might affect the stock’s movement.
details at a glance
Explanations for the Drawing:
The upward purple arrow shows where I bought the stock. The downward purple arrow shows where I sold it.
Horizontal lines represent the breakout points where I should have bought the stock. These moments are somewhat tricky to identify in real-time. The best strategy is to buy when the stock is breaking out to a new high with higher than usual volume, although the volume isn’t always present.
And, always set a stop-loss 7 to 8% below the previous high price.
Notice, that after selling (upper right part of the drawing), the price started to fall. That’s exactly why we need stop-losses!
Opening
- Underlying: SAP
- Date: 22 Feb 2024
- Underlying Price: $180.77
- Stop Loss: $171.97
- Profit Target: $216.93
- Market Outlook: Confirmed uptrend
- RS Rating: 90
- RS Line Trend: Upward (U)
- Industry Rank: 27 / 197
- Volume U/D Ratio: 1.1
- Institutional Ownership Trend: Upward (U)
- Position Risk, %: 4.84
- Position Risk to NL, %: 0.41
- Potential Profit (Position), %: 19.89
- Risk to Reward Ratio: 0.24
- Position Size, %: 8.49
- Reason for Opening Trade: “Strong stock in solid uptrend close to EMA 21. Why did I open this trade at that point? (e.g., CAN SLIM, EMA 21)”
- Was it an Ideal Buy? No. Price was not coming out of the base.
- Remarks: Stop-loss placed below recent low. If the stock starts to close the gap, I’m out.
Closing
- Date: 9 Apr 2024
- Closing Price: $189.48
- Market Outlook (at closing): Uptrend under pressure
- RS Rating (at closing): 89
- RS Change: -1
- Closing Remarks: The position was stopped out during a down day. Market conditions had changed.
Results
- What Went Well? “I bought the stock when it had bounced up from the EMA 21 line. I had raised the stop-loss during the trade, which insured me a small profit and prevented the trade from turning into a loss.”
- Cause of Error / Improvement: Again, I played the EMA 21 game which is okay. However, I should have bought the stock at the beginning of December 2023, when it broke out of its base.
- Lessons Learned: Another confirmation that I have not paid enough attention to the stocks that are trying to break out of their bases.
- Position ROI, %: 3.69
- Position ROI (Portfolio), %: 0.31
- Position Open Time (Trading Days): 32
- Position Open Time (Days): 47
terms and definitions
Breakout: The price of a stock moves outside a defined resistance level, typically with increased volume.
EMA 21 Calculates the 21-period exponential moving average, highlighting short-term trends.
SMA 50 Averages the price over 50 periods, showing medium-term trends without overemphasizing recent data.
SMA 200 Averages the price over 200 periods, revealing long-term trends by treating all data equally.
Industry Rank Investor’s Business Daily’s system that ranks industries 1 to 197 based on performance. It guides us in CAN SLIM TRADING towards leading sectors.
U/D Ratio Measures stocks closing up versus down. A ratio above 1.0 indicates bullish sentiment, important in CAN SLIM TRADING.
RS Rating Ranks a stock’s performance on a 1 to 99 scale. I look for at least 85, showing strong momentum and growth potential.
RS Line Compares stock price to the market, plotted as a ratio. We seek an uptrend, indicating outperformance and strong momentum.
Volatility Measures how much a security’s price fluctuates over time. High volatility means large price changes, indicating risk and potential reward.
Institutional Ownership Trend indicates whether the stock is under accumulation or distribution by the institutions.
EPS (Earnings Per Share): A financial metric calculated by dividing a company’s net profit by the number of its outstanding shares. It indicates the amount of profit attributed to each share of stock, serving as a key indicator of a company’s profitability.
Overhead Supply: is a stock market term for a large amount of unsold shares at a certain price level, acting as resistance that prevents the price from rising. It occurs when investors looking to sell at break-even points add to the supply, making it hard for the stock to increase in value until this excess is bought up.
conclusion
Buying stocks as they break out of their bases is not just about jumping on a bandwagon; it’s about strategically positioning yourself for success with minimized risk. By understanding and recognizing breakout signals, you enhance your ability to make smart, timely investment decisions. Remember, the right stock at the right time can lead to substantial gains. Are you ready to spot your next opportunity?
