Finding breakout stocks…
That’s the nirvana for traders. Just get in and ride the surging price of a stock.
That’s what I work tirelessly each and every day to come up with for you – plenty of breakout stocks that are set to surge.
But you actually do need to know how to trade breakout stocks.
Otherwise, they can bite you for just as much as they can make you.
So, today, I’m breaking down my strategy into four “commandments” for trading successful breakout stocks.
And for this week’s breakout surge stocks in the making, be sure to look at and get involved with the trades on the latest Watchlist.
1: Use Momentum to Your Advantage
This is the strategy used by the greatest traders in the world.
Paul Tudor Jones, William O’Neil, Jesse Livermore and countless other have all used some variation of a momentum growth breakout strategy.
Looking for high-growth stocks with strong momentum, waiting for consolidation bases, buying breakouts, watching volume to identify underlying supply and demand…
You will be hard pressed to find any trader with a track record of super performance that does not take a similar approach.
2: Limit Your Risk
I never risk more than 10% on a trade.
Few traders focus on keeping risk small, but it is the key to big performance. As I discussed in the Aug. 24 issue, losses work geometrically against you.
A 5% loss needs just a 5.25% gain to recover from. But a 50% loss takes a 100% winner to get back to even. The tables below visualize this concept.
The first highlights the impact of one big loser.
The average loss and average gain are the same for both the right and left sides of the table.
But the one that kept losses contained to 10% each trade made 11 times the return.
The next table shows the impact of large losses working against you. 20 trades each – one is made of 100% winners and 50% losers, the other 10% and 5%.
Most people think the results would be the same. But the results are drastically different.
3: Take Quick Profits
By identifying stocks in Phase 2 uptrends just beginning to break out from a base/consolidation, traders are able to buy at the precise time when a stock is likely beginning a new surge higher.
When right, you’ll see profits very quickly. In fact, a proper breakout should never go against you.
So, unlike value investing strategies or “buying the dip” where investors buy, cross their fingers and hope a stock turns around, you will rarely wait more than a few days to see if the move you predicted is happening.
4: Spend More Time in Cash
Any time you are holding stocks, you are at risk.
Anything can happen. A bad jobs report, an oil spill in the Gulf of Mexico, a terrorist attack – any unexpected event that takes place can crash stocks overnight.
The only way to avoid that risk is to be in cash. With this strategy, your money is only in the market when there is an immediate opportunity. The rest of the time you can sleep easy.
Embrace the Surge,
Ross Givens
Editor, Traders Daily Direction
