Valued
Subscriber, Lesson #6 – Buying the Breakout
Normal false EN-AU MicrosoftInternetExplorer4 Normal false EN-AU MicrosoftInternetExplorer4 Normal false EN-AU MicrosoftInternetExplorer4 /* Style Definitions */ /* Style Definitions */ /* Style Definitions */ Normal false EN-AU MicrosoftInternetExplorer4 Normal false EN-AU MicrosoftInternetExplorer4 Normal false EN-AU MicrosoftInternetExplorer4 /* Style Definitions */ Buying the "breakout" is one of the most profitable trading strategies.
A breakout is when a stock is breaking out through previous its highs, either on an intra-day, multi-day or even multi-month or year. It signals that the stock has enough demand to overpower the sellers at a given point. As such, the stock’s volume and velocity increases through this point.
Check out the chart below of a stock breaking out through multi-month highs:
![]() Traders love buying breakouts because generally they are easy to predict, and generate substantial profits in a very short period of time (as opposed to a traditional investor who might buy a stock moving sideways and have to wait weeks, months or even years for a stock to finally push significantly higher).
Breakouts tend to be more pronounced (and profitable) when the stock has formed a long, strong base over a long period of time. This base is a signal that supply and demand is in equilibrium. When a stock
tests the same resistance level multiple times, it absorbs any levels of selling. Once that is complete, the stock will start to peek out of the range and begin attracting a whole new set of buyers. These buyers realize that the selling is done, and that there is no longer a level of overhead supply (resistance). For instance, in the above chart, the stock traded in a $2 range (between $3 and $5) for about six months. Once it broke out, the stock jumped more than $2 in only six days.
TIP: Focus on buying large relative volume breakouts, particularly where the stock has formed a long and strong base.
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