MOMENTUM PLAYS: BUYING THE BREAKOUT
I’ve always loved the fast paced and instantly gratified trades that buying the breakout provides. Typically, within a couple of minutes you know if the trade worked or hasn’t. By taking advantage of momentum we can be a part of driving stocks higher by getting long at the apex point of a breakout setup.
I WANT TO ESTABLISH SOME BOUNDARIES I’M CURRENTLY TRADING WITH.
Maintain a 2:1+ R/R ratio
Maintain 50%+ accuracy
Max risk per trade: $50
Max daily loss: $100
THESE METRICS ARE EXTREMELY PROFITABLE, BUT DIFFICULT TO SUSTAIN FOR A BEGINNER.
UNDERSTANDING CHART PATTERNS
In order to buy the breakout, we have to be able to recognize where the breakout point would be by identifying specific intra-day chart patterns. These patterns have been around for YEARS and are used in some way, shape, or form by nearly every retail trader. Though the market has it’s ebs and flows, the integrity of these patterns are always true, however being a breakout buyer in a bear market is a different story, for example.
There are tons of chart patterns, however I’m going to list below the patterns which I believe to be most significant, especially for beginners.
Diagram above provided by http://www.tradethetrend.guru/
UNDERSTANDING SUPPORT AND RESISTANCE
The ability to read support and resistance is a skill required by any form of trader because it is one of the most important aspects of a trade. The concept of support and resistance is simple: A stock falling into strong support will be dip-bought back up, a stock
moving up into heavy resistance will be rejected back down. When support is broken, and held, that very price level now becomes resistance. When a stock surges through resistance and holds, it becomes support.
This is where a simple concept becomes difficult; applying support and resistance with your chart patterns and also adding relative volume. I think of trading almost like Mortal Combat, the more combos you can perform in each attack chain the more damage you’re going to do and the cooler you’re going to look lol. It’s the same way with trading, sure you can JUST trade a bull flag…but if you trade a bull flag in the wrong place with no volume, well the trade isn’t going to go well for you. But when you apply a clean bull pennant to a stock that has just made a move through resistance and held, that has incredibly high relative volume, with no overhead daily resistance whatsoever it’s likely going to be a runner!
UNDERSTANDING VOLUME
We need to come to the realization that volume is the vehicle which drives any stock in any direction. Without volume there is nothing, null. Before you even think about any type of position you need to affirm the proper volume profile is present.
In consolidation, we like to see fading volume. The volume still needs to be there, it’s very important, but it needs to be fading. At the apex point you should see a MASSIVE wave of volume coming into the stock, and you should be one of them. Obviously no trading system/plan is 100% accurate, and having a great understanding of volume will help you cut losses sooner and smaller.
Volume tells us a story, it’s the only indicator that isn’t lagging. When you see an A+ setup and go to take a stab at the apex point a couple of things can happen: Massive volume comes in driving the stock upward, a small burst of volume comes in sending it to test high of day, or little to no volume come in resulting in no move, or a fade from the apex point. If either of the last two occur, you can pretty much already decide this isn’t going to be a grand-slam trade. When a tiny burst comes through and sends it to test HoD, that’s not the worst outcome but that does mean this may be a trade that’s going to take a bit longer or not work at all. When you buy an apex point and nothing happens, no volume comes, the price doesn’t move up, that’s one of the worst signs. That means the stock might not even be in play today, nobody else is watching, or everyone who is watching is going to SHORT against you. You want to think about bailing out, you’ll get better at feeling this with screen time.
HOW TO BUY THE BREAKOUT
Once you have a general understanding of how support/resistance, volume, and chart patterns you’re ready to start buying the breakout. If you do in fact have a general understanding of the above three concepts, really, this section wouldn’t be needed, but we’ll get into it anyway.
In order to trade the best, leave the rest you need to add convergence to your trades/setups and literally trade combos like in Mortal Combat. By adding convergence you’re going to significantly increase the quality of your trades, however, trading frequency will certainly decline especially in slow market conditions. Do not be spooked off by the idea of less trades, that doesn’t mean less profit. By trading the best, leaving the rest you’re giving yourself the best opportunity to succeed.
Okay so how to actually get involved in a position.. You scan the stocks that are in play today. You’re looking for your chart patterns, how they react to support and resistance, where they are on the chart, how much volume is there, is there anything holding this back, what kind of catalyst is driving this stock, is the daily chart supportive of todays move, etc.
If the chart you found matches every criteria above and more, then this stock is in play for you and ready to go. Depending on how much consolidation occurs, there could be multiple entries. If there isn’t much time for consolidation, you would buy in when the stock is breaking out of the high of consolidation. If it’s a cleaner play, and say pulls back in 5/6 candles to VWAP and your 9EMA there is probably a pivot you can take your entry based upon.
Your entry is either breaking the high, or breaking through a pivot in consolidation. You put your stop at the low of consolidation. You’re taking profit and selling into strength at 2/3/4+:1 R/R ratios and at large resistance levels depending how price action reacts to meeting the level. You want to hold a final piece to see how far it’ll go, this won’t always pay you, but in this specific example you would’ve been paid HANDSOMELY for holding that final 20% of your position.
FINAL NOTES
All of this seems so simple to do, and the reality of it is that it is. However, when you let your personal problems and emotions get in the way of trading you will never become a profitable trader. By executing a very specific, meticulous plan like the one I’ve outlined for myself/you to use you can unlock the potential the become a profitable trader.
Hey nice post!