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PSE Stock Investing: Master The Power of Breakouts

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The price of a currency or an asset may increase or decline until it hits the resistance and the support levels, respectively. After that, it will be expected to change direction. But this is not always the case, sometimes, the price may rise beyond the resistance and fall below the support levels. When it moves past the resistance and support areas, it indicates a breakout. If the breakout goes past the resistance area, it means that the price will continue to increase until some new resistance level is established. Also, when the price moves past the support area, it will continue declining until a new support level is attained.

Important things or the power of breakout

A breakout occurs when the price moves below the support or resistance level

Breakouts may be subjective and may not be recognized by most traders

The breakout provides a new trading opportunity when it occurs on the uptrend, it signals that the traders should go long. When they occur on the inside, they indicate that traders should get short.

If the volume is high, it signals an increasing interest in the asset. So, the price is likely to move further in the breakout direction.

Breakout on low volume is likely to fail; thus, the price may not move in the anticipated breakout direction.

What breakout tells us?

It tells us that the price may have been contained at the support and resistance level for some time. So it is time it must be let to go.  This is the point at which the traders have been using as entry and exit points. So, when the price breaks out, traders get lined to place trades. Those who had placed trades expecting the price to change direction after it hits the support or resistance levels exit to reduce loses.

If the average volume is high, it confirms that indeed it is a breakout and so it increases the level of significance to traders. More traders are convinced to place more trades at this level. But if the volume is low, the breakout is likely to fail. If the price falls, it falls back before the resistance level. If the breakout fails, the price will move back to its support level.

Patterns such as head and shoulder, wedges, flags, triangles are indicators of a possible breakout. Traders will monitor and use them to exit long positions and initiate short positions if the breakout is below the support areas.

Typically, after a breakout, the price may retract a little bit towards the breakout point before it moves in the anticipated breakout direction. The psychology behind this is simple; traders buy before the breakout and will attempt to sell their assets to make a profit quickly. This action will drive the price to the break out point. But if the breakout does not fail and is legitimate, the price will be expected to move in the breakout direction.

When a trader identifies breakouts, it helps them to buy the biggest winner.  It makes institutional investors enthusiastic, and so they are likely to increase their volume of trade. It results in a situation where the volume of trade surpasses any recent activities. Since price breakpoints increase both the price and volume of trade at the resistance level, it increases the chances of making more gains. Also, it increases the rate of returns.

But if you choose to buy around the breakout, chose your entry point carefully. The reason is that there will always  be some pullbacks which can lead to losses

Do not fear breakaways 

Breakouts occur when some news emerges. For instance, when a company releases good news on its earnings, it may push the prices up beyond the resistance area.  The price of the company’s stock is likely to move up by even 10 %.

In some cases, the good news causes the investor to re-evaluate the net worth of the company. When you combine it with optimism, it makes the price to price of its assets to grow. Buying as close to the open as possible is recommended. It assures you of bigger gains.

 Things to consider when you want to invest in a company

If you are a long term trader, buying stocks from companies that have a bright future is advisable. Look at the strength of earnings and the company’s sales growth. Also, look at other aspects like leadership, return on equity, and how often the company releases new products. Also, consider investing when the company experiences new breakouts.

Precaution

Being on the watch out for breakout alerts is critical. It can help you make huge gains. However, it is necessary to remember that some breakout may not work, so you will need to protect yourself with stop losses. However, if you accurately determine a breakout that will work for you, you will profit and improve your portfolio.

Strategies to use to gain from breakout

To gain from a breakout, you must remain strategic. This will help you to determine trends in their early stages. It presents limited risks since it is characterized by huge increases in prices. Here are the strategies to help you profit from the breakout.

  • Identify the target candidate- keep an eye on stocks that have built a stronger resistance level. If the resistance and the support are stronger, the more likely you will get a better outcome.
  • Wait for the breakout – once you have identified the candidate, wait for a breakout. However, don’t rush into trading. Wait until the end of the trading day. It confirms that the trend will continue.
  • Set some reasonable objectives- determine where the trade is going and decide when to exit.
  • Let the stock retest- once it breaks its resistance or support level, the old resistance becomes the support, or the old support becomes the resistance level. A good breakout should retest the broken level.
  • Know when the trade pattern fails- if during the retesting, it breaks back through the old support or resistance level, it shows that the breakout has failed. Just take the loss and exit.
  • Exit trades when the market closes
  • Exit the market when it nears the close of the market. But if the stock remains outside the earlier predetermined resistance and support level as the market heads to closing, exit the trade and move to the next one.
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