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Guest post by: Gary Kerkow Become an Author

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This strategy can make you wealthy



Breakout trading is used by traders and investors to take a position within the early stages of a trend. This strategy usually can get you in near the starting point of a major price move. The key to making big money is getting aboard the right side of a major price movement. Then, as the market goes your way, you can strategically add to your position. It is wise to always practice sound money management. This can be achieved by implementing stops.

Definition of a breakout

Breakout trading involves a stock or futures price that moves outside a defined support or resistance level with increased or heavy volume. After the breakout, you would enter into a long position if the price breaks above resistance. You would enter into a short position if the price breaks below support. Many times you will see an increase in volatility, with prices usually moving in the breakout's direction.

The best traders and investors use this strategy



Richard Dennis of the famous Turtle Traders used breakout trading to make hundreds of millions of dollars. This is after starting with only a few hundred dollars. Dennis completely understood that all trading is based on probabilities. He knew if you traded a stock or future at the proper breakout point, the odds were in your favor every time.

William J. O'Neil, founder of Investors Business Daily, and the winning system called CAN SLIM, is also a breakout trader. O'Neil looks for fundamentally and technically sound stocks that are market leaders. He will only buy a stock when it breaks through a key resistance area with heavy volume. O'Neil is considered by many to be the greatest stock market operator ever.

The flat base is a lucrative chart pattern

One of the best chart patterns for breakout trading is the flat base price structure. It moves pretty much straight sideways, in a somewhat tight price range. During much of the pattern, the volume tends to be lower than normal. Many times, the longer a stock remains in a flat base, the greater the price appreciation when the stock breaks out.

For a stock, the formation should be at least 5 weeks long, and should not correct more than 10 to 15% inside the pattern. You can draw a trend line across the top of this formation. The stock is bought as it breaks the trend line, and volume increases. The more volume on the breakout, the better. After the breakout, you can place a stop under the old resistance level, which now becomes a support area.

Here is a great example of breakout trading. A stock trades in a price range of 25 to 28 dollars per share for about 3 months. During the 3 months of this trading range, volume was usually lower than normal. The stock breaks out to $28.25 per share. The volume on this breakout is triple the normal daily average. This is your buying signal. It is wise to make sure your stock candidates are sound technically, and fundamentally. This will increase your odds for success.

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