Volume breakout trading is not a recommendation for beginners. Yet, it is an effective strategy to earn high profits amidst volatile markets. So, what is it? And how to spot strong volume breakouts? You can find the answers through this blog!
What Is a Volume Breakout Trading?
The breakout indicates the movement of a stock price with increased volume above a resistance area or below a support area. For example, spotting a breakout in the chart pattern to the upside indicates the possibility of a higher-trending price.
If the stock price is above resistance, a breakout trader will enter a long position. Otherwise, they will enter a short position if the stock price moves below the support area.
Breakouts are among sweeping trading strategies as the setups refer to the beginning of large price swings, future volatility, price trends, etc. The most considerable price movements can be the outcomes of many factors, such as channel breakouts, price pattern breakouts, such as triangles, flags, head and shoulders patterns, etc.
The Messages That a Breakout Brings
A breakout shows that the stock price can be either below a resistance level or above a support level. The support and resistance level is what many traders use to decide on their entry points and stop loss orders.
If the stock price is higher than the average volume, you can confirm the presence of a breakout. Meanwhile, little volume on the breakout will not be strong enough for traders to place a trade next to the level. The reason is that most low-volume breakouts fail.
There are two scenarios, an upside breakout, and a downside breakout. If the upside breakout fails, the stock price will drop back below resistance. If the breakdown (a downside breakout) fails, the price will rise above support.
The companions of breakouts are ranges and chart patterns, such as flags, wedges, head-and-shoulders, triangles, etc. The way prices move will form these patterns to create the levels of support and/or resistance.
The stock price will often go back to the breakout point regardless of a high or low volume breakout trading. The tendency of buying the initial breakout and quickly selling for profits by short-term traders can explain such retrace.
If the breakout is legit (meaning it does not fail), the price will move back in the breakout direction. In case that it does not retrace, the breakout is a failed one.
How to Find Volume Breakout Stocks in Real Time?
Firstly, you need a market with the area of support or resistance. The more times a stock has bounced off the level, the better it becomes. There will be consolidation if the market is stuck between the support and resistance areas.
The longer consolidation lasts, the bigger breakouts become. A stock trading in a set range for a considerable length of time often continues to create a bigger than the one with a few-week consolidation.
It is quite an impossible mission to spot breakout stocks by our eyes. So, breakout stock scanners step in and change the whole game. It does not only ease the process but also helps you react quickly to the changes or reversals of market movements.
What Are The Steps To Follow When Trading Breakout Stocks?
Determine the Breakout Stock Candidate
You should find and keep track of strong breakout stocks. The note is that the stronger the levels of support and resistance are, the more the move will be from the breakout.
Enter When The Breakout Is Ready
Being able to detect a good stock does not mean you finish the whole process. Timing of the breakout is important so patiently wait for the moves of the stock price. Even when the breakout occurs as the price trades outside the support and resistance areas, you need to check whether the breakout holds.
A simple rule is to set up a bullish position when prices are set to close above resistance. Otherwise, an investor will take on a bearish position as prices are below support.
A breakout and a fakeout are two confusing terms, so it is important to determine the difference. So, you can gain the best out of opportune market trends rather than stumble into pitfalls.
For instance, fakeouts take place as prices open above a support or resistance level. Yet, they move back within a previous trading range. If an investor quickly confirms trades, potential losses can be high.
Set an Achievable Goal for Breakout Stocks
If you have the intention of trading the breakout stock, you should have a reasonable expectation of where it will go with chart patterns. Otherwise, you cannot keep track of market exits.
Retest the Stock Breakout
If a stock price breaks a resistance level, the old resistance level will become new support. Meanwhile, if a stock breaks a support level, the old support level will become new resistance. So, breakout traders will usually test the level after the breakout to have better preparation.
Pinpoint Failed Trades/Patterns
If the retest of the stock breaks back through the previous support or resistance level, the breakout or pattern has failed. Reaching this point, you must be willing to take the loss and should not undertake more risks.
Stop Trades When the Market Closes
Traders tend to wait until the market is going to exit a losing trade. They wait for the right time to gain an optimal risk/reward ratio. If a stock has been outside the set level of support or resistance toward the market close, you should close the position and continue with the next one.
Exit When You Reach Your Target
When the stock price reaches its objective or time target, you should exit trades for maximal profits and minimal risks. Otherwise, you should remain in the trade.
The Role of High Volume On Breakout in Stock Trading
A high volume breakout trading is what should be at least 40% above its daily average over the past 50 sessions. Such breakouts will generate a good chance of accumulating big gains. Meanwhile, a weak volume breakout usually brings back a bad sign. The implication is that institutional investors are not active so the stock might maintain its basing.
The confirmation of breakout is a top priority to build viable trading strategies for consistent profitability. The relative strength line (RSL) is useful to confirm the breakout’s strength.
In a Nutshell
Volume breakout trading requires observation skills, analysis, and patience for the right timing to earn the best profits. So, the fundamentals and the right tactics right from the start play an important role. Hopefully, what this blog provides can help you build a solid foundation.