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Strategy I: Breakouts

Breakout is one of the most effective and popular trading strategies. Experienced day traders do not buy or sell a stock before seeing indications that a stock may start a significant move. Then, monitoring a stock that has stayed in a narrow price range for some time (usually longer than 30 minutes or an hour), traders buy or sell the stock if it suddenly moves out of the range with significantly larger trading activities (larger volumes). The following charts are examples of breakouts picked by Tradetrek's "Day Trading Center:"

Figure 1. ADSK traded within a narrow range for about 3 hours until it breaks out with large volume at 14:25pm. Tradetrek picks up this bullish signal, as it presents itself-no delay--at 14:25 pm. The strategy is to buy the stock at a price near 35.18, right on the heels of the breakout, in hopes of taking profit at about 36.25, which is the most recent resistance level. In order to protect the down side, the trader should enter a stop loss order, right after the buy order is confirmed, to sell the stock at 34.82.

Figure 2. TBH traded within a narrow range for about 3 hours until it breaks down with large volume at 13:15pm. Tradetrek picks up this bearish signal at 13:18pm. The strategy: to short sell the stock at a price near 68.26 right after the break, then aim to cover and take profit at about 67, which corresponds to a move about the size of the average daily range. To protect capital, traders should enter a stop loss cover order, right after the short sell order is confirmed, to buy the stock at 68.93.

By buying or selling the stock, then entering a stop loss order immediately afterwards, one will be stopped-out at a limited and controllable loss if a signal proves to be a false Breakout. Otherwise, one can wait until the stock price has stabilized at another trading range, then exiting at a profit. Again, of course, one should always remember Rule #1: always clear the position before the market closes.

Our computers at Tradetrek.com are constantly searching the entire market data-stream for Breakout trading opportunities, which we promptly display at Tradetrek's "Day Trading Center." We also provide, for the trader's reference, "optimal entry and cut-loss levels." These levels are derived from great numbers of historical back tests, such that traders who follow those rules would achieve optimal returns with minimum risks. Given the difficulty of calculating an optimal profit target, we do not provide one. There are, however, a few steps that a day trader can take to tailor an individual estimate. One useful reference is the average daily price range. In a single trading day, traders should not expect a profit much bigger than the size of the average daily price range. Following a breakout, if the trade is already making a profit comparable to the average daily price range, it is time to unwind the trade. Traders also choose to successively raise the stop loss level if the trade makes more and more money. In this way, they protect profits and keep the opportunities open for higher gains.