Breakout Plays

Breakouts

Explanation of Play

Breakouts can be some of the most interesting plays, but you must be selective in choosing them. Properly identified and played, breakouts may offer upside profits within one to seven trading sessions. The breakout screen looks for two main criteria:

1) Stocks making a 50-day high (50 day low for the bearish play)

2) Stocks where today's trading range is greater than or equal to the largest (high to low) of the past nine trading sessions.

The only remaining criteria are that the breakout candidates continue their upward (or downward for the bearish play) trend in the next trading session - if they do, that's when you would consider taking a position.

Some Reasons for Breakouts

Things in motion tend to stay in motion
Stocks making new highs often get noticed
Industry pressures
News, new products, new management

Potential Entry Points

An additional check point before putting on a Breakout play is to make sure that the stock continues it's upward (or downward for the bearish play) trend in the next trading session.

Overall market conditions can also play an important part in determining the significance of a Breakout play. For example, a stock breaking out in an up market can be more likely to continue to new highs. A stock breaking out in a down market may struggle to make new higher highs (Though a stock that does continue on in down trending markets may explode upward when the down market turns around.)

Potential Exit Points

Your exit point, should be tied to your risk tolerance. You may want to consider a trailing stop loss as your exit strategy; you may want to start with a stop loss at some level below the previous day's low and move it up if the stock moves up.

With Breakouts, one of the best exit strategies is to enter plays on only the very best Breakout candidates. This sounds obvious, but you truly need to be selective with Breakouts. Many Breakouts just peak through the new high or point of resistance and head back down. That's why you may find it a good idea to add more stringent criteria to your breakout screen so you evaluate prospects that are tailored to your risk tolerance (see the next slide for an example).

Some stocks "rest" for three or four days once they hit the initial Breakout point before they continue to climb

Summary

Not all Breakouts are created equal - examine them closely.
To increase your chances of finding true Breakouts, consider adding a volume explosion criteria to your screen.
Some stocks "rest" for three or four days before they move again.
You may want to consider a trailing stop loss as your exit strategy; start with a stop limit order you're comfortable with and move it up if the stock moves up.

Discuss Break out Plays in our forum - Strategy Central Board.