Breakouts through resistance are the most desirable of all trade opportunities. (This discussion will be the buy opportunity discussion of breakouts. (An equal sell opportunity exists on breakdowns through support). A breakout is a penetration of resistance based on a pricing established over time with price reversals taken place at approximately the same price point in previous time periods.
Sounds easy. Well it sure sounded easy when that guy in the $1000 seminar told me about it. I also read how easy it was in the $90 book on trading that said would make me a wealthy independent trader.
Breakouts are wonderful if they continue. If they fail you can expect the pricing not to trend but to return to a range bound probably touching the lower pricing before it rises again. That price movement is probably beyond your stop loss and you will not be pleased.
This occurs more often than you want to believe. Since so many other people see the breakout they are as nervous about it as you are and you have a larger number of quick exits with the slightest wiggle. This is referred to as “buyers remorse” or a “bull trap”. What this really represents is a serious hit against your P&L.
Remember, breakouts are a product of an established range bound market. The continuation of the sideways market is the rule with a move away from support or resistance back into the trading range. That means a failed breakout is the rule. The breakout is the exception. Some traders believe the reverse is true. That can cost you a bundle of cash in trading losses.
In addition, MACD Plays: When you are considering any stock you need to know if that stock is exhibiting a tendency to trend. If you wish to be more successful in your trades, then you should be able to identify those stocks with this tendency. Logic dictates that you will make more profits in trending stocks rather than in those issues that fluctuate up and down.