Breakout Strategy

Breakout strategy is highly effective yet simple. It has been used for decades to get high returns while keeping risk low.

Let us take an example:

Stock/Share price:  98 (Closing)

52 week high:  100

52 week low:  88

After 2 days:

Stock/Share price: 101 (Close)

The share price has moved above the 52 week high. This would be considered a breakout, it is important to keep an eye on the volume as well.

How to use breakout strategy?

  1. Buy the share
  2. Set a stop-loss slightly below the breakout level, in example 100

Pitfalls of breakout strategy?

  1. Risk Management: not all breakouts are profitable, invest small amount of capital
  2. Fake Breakout: The share/stock might breakout today and be back into the trading range tomorrow

How to avoid the pitfalls of breakout strategy?

  1. Risk Management: invest small amounts.
  2. Check if volume traded is greater than average volume.
  3. See how the share/stock did when it broke out before.

Read Next: Trend following strategy

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