BALTIMORE (Stockpickr) -- You don't have to know much about trading to figure out that if a stock is in "breakout mode," you probably want a piece of the action. But what exactly constitutes a breakout? And why do they work?
In this technical primer, we're going to take a look at the nuts and bolts behind how how a breakout trading strategy works -- and how to implement it for your portfolio.
If you’re familiar with technical analysis, chances are you’ve at least heard the term “breakout trading” before. As the foundation of the uber-successful trading systems used by some of the biggest Wall Street investment managers, breakout trading is one of the most effective technical strategies out there -- and also one of the most nerve-wracking.
After all, it's one thing to analyze technical charts after the fact to find trading opportunities, and it's yet another to pull the trigger on a real trade. Using a technical strategy has significant advantages. Whether used as a standalone method of analysis or as a timing supplement to fundamentals, technicals can provide significant cues about a stock’s potential price movement.
Almost any method of analysis seems great in theory, but the money is made where the rubber meets the road. Not surprisingly, applying technical analysis concepts to real-world markets is also where most people (particularly those with fundamental backgrounds) have the most trouble.
What Is Breakout Trading?
Breakout trading is one of the most popular methods of applying technical concepts to live financial markets. In its simplest form, breakout trading is the practice of buying stocks as they “break out” above a prior resistance level or “break down” below a prior support level.