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AN OUTBREAK is a technical analysis term used to describe the movement of a stock out of a set trading range as it moves away from that trading range as the pace increases – once either support or resistance is broken. Breakouts can happen in any time frame, and catching and riding one is one of the most fun and profitable trading styles out there.
Indeed, our day trading systems are [http://www.daytradeteam.com/dtt/daytrading.asp] use this method almost daily for profitable trades. For example, if a stock has traded in the $ 6 to $ 8 range for a month and is floating between those two levels, a move between $ 8 and $ 8.25 could mean a breakout. The same is true of the intraday movement, where a stock eventually falls below $ 50.45 after bouncing off that support level all day.
The first step in detecting a breakout is to determine the length of time you want to hold the position. Regardless of the length of time, use a graph at least five times as long (10 is preferable) to determine your support and resistance points. In other words, if you are looking for a 1 hour trade, look at the last 5-10 hours to see if you can find a range and solid support and resistance levels. When looking for a 5 day hold, keep an eye on the stock’s 25-50 day charts to see your key support and resistance levels.
The best way to explain this is always with examples, so look at a hypothetical scenario for DELL:
Let’s say in the past 2 days, DELL has seen significant SUPPORT (price where the stock continuously bounced) at 31.55-31.60. RESISTANCE (price at which the stock jumped consistently down) is around 32.10.
Knowing these numbers, we can DELL watch for signs of an OUTBREAK. Any move by DELL below the support level (less than 31.50) or above the resistance level (above 32.15) could indicate that the stock is breaking out on the next trading day. IMPORTANT: In breakout games, you’re playing IN THE SAME DIRECTION that the stock is moving – if it went down through the support, you should sell the stock short. If it went up through resistance, buy the stock. The breakout theory is that once the stock has moved through a significant level of support, it is an indication that buying the stock is slowing and that from that point the stock may accelerate downward very quickly. The opposite is the case with stocks that are moving up through resistance (selling subsides).
FAKEOUT: Of course, no trading style is 100% accurate. Often times, stocks move through a support or resistance level and then quickly pull back into the trading range. ONCE YOU ARE IN YOUR BREAKOUT POSITION, set a STOP-LOSS exactly on the other side of the support / resistance level you just broke. If the stock moves back below this level, the breakout has not occurred and there is no point in holding the position any longer.
OUTBREAKS ARE RARE: Remember, you can watch a stock for days without ever seeing a breakout. Real breakouts occur when a stock moves through a well-established support / resistance level in INCREASING VOLUME. To find breakouts effectively, it is important to browse lots of stocks and wait for your moment. DayteradeTeam scans thousands of stocks every hour looking for the one opportunity that can bring profit to all of our subscribers!