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?
- Buy the share
- Set a stop-loss slightly below the breakout level, in example 100
Pitfalls of breakout strategy?
- Risk Management: not all breakouts are profitable, invest small amount of capital
- Fake Breakout: The share/stock might breakout today and be back into the trading range tomorrow
How to avoid the pitfalls of breakout strategy?
- Risk Management: invest small amounts.
- Check if volume traded is greater than average volume.
- See how the share/stock did when it broke out before.