Thursday, June 25, 2009

Five Things to Look for in a Stock Market Breakout

It's easy to become lulled by range-bound trade and then miss a significant price breakout. There are several things I look for in identifying a promising breakout move:

1) The presence of an extended trading range - On average, the longer the range, the more extended the subsequent breakout/trend move, as a greater number of traders are forced to cover positions (thereby extending the breakout).

2) An increase of volume on the attempted breakout - The fresh higher or lower prices attract the participation of large, institutional traders, as we begin to accept value at higher or lower prices.

3) One-sided sentiment on the attempted breakout - A valid breakout will show persistently elevated or weak NYSE TICK and extremes of volume transacted at the offer or bid.

4) Limited retracements - Pullbacks following the breakout thrust are limited both in terms of TICK values and amount of points retraced.

5) Broad participation - The attempted breakout will have broad participation, with the major indexes and sectors moving to new highs or lows.

Many good breakout moves occur following short-term oversold or overbought markets. That is because many traders who are holding positions short or long are trapped by the breakout and need to exit, adding to the buying/selling of momentum traders.

The above five features of a valid breakout make a nice checklist to keep in mind when we trade within an extended range.


markus said...

"Many good breakout moves occur following short-term oversold or overbought markets."

That might be a reason for a false break-out which preludes the real one.


JMcD said...

When you say oversold or overbought, what time frame are you thinking about?

Brad Zurich said...

I think those people who are positive on the stock markets should stay invested because though doubts remain the market will in the long run move upwards hereon.

For those who have doubts about the market then day trading is the best option to trade with each session.

Buy on dips and short on highs this is the best way for Day traders as money making opportunities are aplenty and €500 a week is something that is achievable.

Stock Trading Tips