Anatomy of a Breakout Trade
This is the anatomy of a breakout trade.
First, you want to see a large advance in the stock. At a minimum, price should be at least 30% above its 52-week low. Stock will often be up several hundred percent before forming this pattern.
Next, you want to see a series of pullbacks - each with a shallower depth than the last. Mark Minervini refers to this as a volatility compression pattern or "VCP". This pattern is a visual representation of the supply/demand dynamic playing out. There is supply, i.e. sellers, near the $33 level. Each time the stock reaches that level, selling pressure sends the stock lower. However, as those sell orders are worked through, each pullback should be shallower than the last - a sign that there are now fewer sellers. The stock is being transferred from weak hands to strong handed buyers.
Ideally, you want to see the final pullback in the single-digit range.
Look for signs of institutional accumulation during this pattern. These are large green volume candles showing heavy buying by large funds. I also like to see volume dry up in the final days leading up to the breakout. This is further confirmation that sellers are gone and the stock is becoming harder to buy. With little supply, any increase in demand, i.e. buying, will easily propel the stock higher.
Finally, you want to buy the moment the stock clears resistance. If there is not a clear resistance level like on this chart of CCB, use the high of the most recent pullback as your breakout point. This is where you want to buy.
Place a stop beneath the last swing low (the low of the last pullback). If done properly, you should never need to risk more than 10%.
Although not necessary for a successful trade, high volume on the day of the breakout and during additional up days soon after the breakout will greatly increase the odds of a profitable trade.
First, you want to see a large advance in the stock. At a minimum, price should be at least 30% above its 52-week low. Stock will often be up several hundred percent before forming this pattern.
Next, you want to see a series of pullbacks - each with a shallower depth than the last. Mark Minervini refers to this as a volatility compression pattern or "VCP". This pattern is a visual representation of the supply/demand dynamic playing out. There is supply, i.e. sellers, near the $33 level. Each time the stock reaches that level, selling pressure sends the stock lower. However, as those sell orders are worked through, each pullback should be shallower than the last - a sign that there are now fewer sellers. The stock is being transferred from weak hands to strong handed buyers.
Ideally, you want to see the final pullback in the single-digit range.
Look for signs of institutional accumulation during this pattern. These are large green volume candles showing heavy buying by large funds. I also like to see volume dry up in the final days leading up to the breakout. This is further confirmation that sellers are gone and the stock is becoming harder to buy. With little supply, any increase in demand, i.e. buying, will easily propel the stock higher.
Finally, you want to buy the moment the stock clears resistance. If there is not a clear resistance level like on this chart of CCB, use the high of the most recent pullback as your breakout point. This is where you want to buy.
Place a stop beneath the last swing low (the low of the last pullback). If done properly, you should never need to risk more than 10%.
Although not necessary for a successful trade, high volume on the day of the breakout and during additional up days soon after the breakout will greatly increase the odds of a profitable trade.
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