How to Find Break Out Stocks? A Complete Guide

You may have come across the term breakout before. Breakouts are common occurrences in the stock market. They pop up when a price makes its move beyond certain levels.

But many new traders don't know how to recognize breakouts. Instead, they jump right in and buy or sell the underlying stock.

This guide will dig deeper into what a breakout is and how to find breakout stocks. If you want to get familiar with breakouts in the stock market, this guide can help you.

So, make sure to stock till the end!

What is a breakout in the stock market?

The movement of stock above or below a predetermined price level is referred to as a breakout. These are the levels of support and resistance.

The resistance or support level is a clear line that many traders use to determine entry and exit locations. When the price goes beyond the support/resistance levels, traders waiting for the breakout enter the market, while those who did not want the price to break out exit their positions to prevent further losses.

Breakouts signal that the price can begin moving in the breakout direction. A breakout to the upside from a chart pattern, for example, might imply that the price will begin to move higher.

Breakouts on high volume (compared to typical volume) demonstrate stronger certainty, implying that the price is more likely to move in that direction.

How to identify breakouts?

Breakouts can occur in any market condition. The most volatile price moves are typically the consequence of channel breakouts and price pattern breakouts such as triangles, flags, or head and shoulders patterns. Volatility often expands once prices move outside the stated ranges as it contracts within these periods.

If there is a little volume on the breakout, the level may not have been meaningful to a large number of traders, or not enough traders felt confident enough to place a trade around the level at the time. As a result, these low-volume breakouts have a higher failure rate.

If the upward breakthrough fails, the price will fall back below resistance. If a downside breakout, also known as a breakdown, fails, the price will bounce back above the support level it broke below.

A key point to add here is that even after a strong volume breakout, the price may retrace to the breakout point before continuing to move in the breakout direction.

This is because short-term traders sometimes buy the initial breakout but then seek to sell immediately for a profit. This selling momentarily returns the price to its breakthrough position.

If the breakout is valid, the price should return to the breakout direction. If it does not, it is a failed breakout (we will discuss failed breakouts later).

Types of breakouts

The price can make wild swings when trading breakouts, so it's best to know various types of breakouts.

There are three breakouts types; reversal, consolidation, and triangle.

Let's define each one of them.

Reversal

A reversal breakout occurs in a downtrend when prices sharply reverse and soar higher on large volumes. It happens when a large number of short sellers enter the market.

These reversals are frequently the outcome of recent news or an anticipated event. Following these reversals, prices can skyrocket.

Consolidation

After a period of consolidation, breakouts might occur. Consolidation is defined as flat trading, in which prices are confined inside a predetermined trading range on relatively minimal volume.

The trading range usually has well-defined support and resistance levels. So while consolidations suggest a lack of interest, they may also be considered quiet before the storm. And when the price goes through a period of consolidation, it can make sudden moves.

Triangle

Triangle breakouts happen when the resistance level is flat while the support level increases consistently. This suggests that buyers are growing impatient and gradually raising their offer prices, causing the pullbacks to diminish. It's also referred to as ascending triangle breakout.

How to trade breakout stocks?

Now that you know what breakouts are, how you can identify them, and their types, let's move towards how you can trade breakouts stocks.

Trading breakout stocks isn't like solving an algebraic expression. You just need to identify support and resistance levels.

A support level is the lower bound for stock movements, whereas a resistance level is the highest price it trades within over a long period.

At its support level, a stock's demand is at its lowest, indicating that most traders are inclined to sell it. Conversely, most traders are eager to go long on the stock at the resistance level, suggesting they want to add it to their portfolios.

The key to trading breakout stocks is to focus on those on the brink of a breakout or who have just gone above resistance.

How to enter the trade?

To enter the trade, wait for prices to close above a resistance level and open a bullish position. Conversely, when prices are expected to fall below a support level, you can enter a bearish trade.

Wait for confirmation to tell the difference between a breakout and a fakeout. Fakeouts occur when prices open above a support or resistance level but end up falling back inside a previous trading range by the end of the day.

There is no certainty that prices will continue to rise if you act too hastily or without confirmation.

How to exit the trade with profits?

When determining profit objectives, consider the stock's previous performance. It is simple to set a take-profit based on previous price activity when trading price patterns. When deciding where to exit a losing trade, consider the previous support or resistance level beyond the price level.

Placing a stop safely within these limitations is a safe technique to safeguard a position without increasing the potential risk of the trade.

Managing a breakout trade

Okay, you spotted resistance, waited for a breakout, and then placed your buy order on significantly higher-than-average volume. You must now handle the trade.

Breakout trading is all about risk management and losing as little money as possible. To do so, set a stop-loss order at the low of the previous day's closing. The previous day's closing frequently corresponds with the candle just before the breakout.

Never put more than 1% of your capital at risk on a single trade. A 1% loss rule allows you to lose several trades and come out ahead.

Most importantly, after you've set your stop-loss, you can only adjust it in the direction of your trade. Never reduce your stop-loss because you're frightened of losing. Instead, accept the loss and try again.

Examples of breakout stocks

Let's illustrate breakout stocks with examples:

1. Oct. 17, 2019, was a huge day for CAN SLIM growth stock investors looking at the bedding industry's behemoth. With an 81.95 buy price, the stock broke out of a well-formed flat foundation.

Volume surged substantially higher than usual, 71 % over its 50-day moving average in turnover.

Tempur Sealy did not make considerable pricing progress at first. However, Halloween turned out to be a frighteningly excellent thing for holders.

After reporting a robust 27 percent increase in third-quarter earnings per share and a sixth consecutive quarter of increasing sales growth, the stock screamed 11 percent higher in a massive volume.

Tempur Sealy shares advanced approximately 13% from the proper buy point to a session high of 92.33 on Oct. 31.

2. Baxter International, Inc. (BAX) stock is a textbook example of stock breaking out of a trading range. From mid-2005 until June 2006, BAX traded within a limited range.

The support line is slightly over $34.50, while the resistance line is close to $38.00. In 2006, the levels of support and resistance were evaluated multiple times.

On Jul. 20, 2006, BAX started significantly higher than its previous close, traded previous resistance, and ended at $38.88. This is a pattern in which a stock's beginning price is much higher than its previous close and goes upward, breaking out of its trading range.

Why are stock breakouts important?

Traders follow the activity. The key characteristics that attract traders to stock are volatility, momentum, and liquidity.

Often, a fundamental catalyst initiates the breakout, such as news, events, or rumors. It attracts additional traders to the stock as early as pre-market, perhaps causing the gap. Breakouts can happen on any day after the price has rested or reversed.

Here's an illustration of why stock breakouts are important.

For example, a trader may frequently short a stock at the resistance region and purchase at the support area in a set range. The longer this range persists, the more likely it is that more and more individuals are doing the same thing.

What happens to short sellers when the price initially rises over the resistance level? They may short-sell more shares if they believe it is simply a wobble.

They leverage additional shorts, building up a greater position than usual, anticipating a price decrease. But, to their horror, instead of drawing back within the range, the price continues to increase as volume rises. What comes next? Short sellers begin to cover their holdings fast to limit their losses.

This is why stock breakouts are important as it tells you the general market situation. In addition, this allows you to enter or exit the trade profitably.

Breakout stocks to consider

In 2021, we have seen many stocks make wild swings. If you are looking to trade breakout stocks, then you can consider these stocks:

Alphabet

Alphabet may be the most unexpected stock on the list. After all, the corporation is a technological behemoth with a market capitalization of more than $1.8 trillion. Alphabet, on the other hand, is undeniably a breakthrough stock. As a result, its stock is up more than 55% this year and is close to a record high.

Alphabet checks off two critical boxes for investors. It has a large moat, with billions of people using its goods. In addition, the company's businesses have great growth possibilities. Even with its stock at an all-time high, Alphabet appears unstoppable.

Celsius Holdings

Celsius Holdings' stock is on the verge of tripling year to date. The share price of the energy drink manufacturer has increased by about 1,940 percent since the beginning of 2020.

Celsius' historical financial performance is a primary cause of the stock's record highs. The firm posted an all-time high sales of $65.1 million in the second quarter, up 117 % yearly.

Home Depot

Home Depot is towards the bottom of the list of today's breakthrough stocks to purchase. Homebuilder stocks have been on fire this year, and while Home Depot was up considerably for 2021, recent earnings were still strong enough to add another 5.7 percent to the gain.

HD stock performed a clean high-base breakout pattern with the debut. Volume surpassed 8 million shares, marking the most active day since the company's most recent quarterly report.

Cloudflare

Cloudflare is a cloud computing company. The company's good financial performance demonstrates that Cloudflare's ambitious expansion strategy is paying off.

Over the last year, its client base increased by 31% to 132,390, and the typical consumer spent 24% more. This compounding dynamic resulted in $589 million in income over the last 12 months, a 51 percent increase over the previous year.

Alnylam Pharmaceuticals

In general, biotech stocks have underperformed so far this year. Alnylam Pharmaceuticals, on the other hand, has a quite different story. Alnylam's stock has risen more than 55% to a record high.

Pro tips for the break out stocks

Here are some pro tips for the trading break out stocks:

Wait for high volume

One of the greatest methods to validate a breakout is increased trade volume.

If a stock has been consolidating and volume has been low, a large rise in volume might be a great breakout confirmation indication.

Any type of catalyst earnings, such as a merger, a new product, or a management shakeup, might cause a surge in volume. It's another good sign for a possible breakout trade. However, patience is required. Wait for the volume to rise before jumping in.

Scan for potential trades

The scanner is one of the most effective trading tools available. A scanner can sift through a large number of stocks to find those that meet a certain set of criteria.

And the sooner you spot a pattern on a possible breakout opportunity, the better.

Build a watchlist

Creating a watchlist is essential for each trader. You keep an eye on your stock list for future trading chances.

With so many stocks breaking out, setting new highs, and trading at such high volumes every day, how can you possibly know which setups are ideal for you? You can't do it without a watchlist.

Run the scans, then add the stocks to your watchlist that best meet your trading strategy. This allows you to maintain your focus.

Trade with the trend

As a general guideline, especially if you're new to trading, you should always stick to breakouts that follow the trend. Maintain a straightforward approach. Pay attention to breakouts that move in the direction of the market trend.

A good strategy is not to short a stock in a hot sector with significant volume and momentum. Also, don't go long on a low-volume company in a fading industry that's losing steam.

Focus on hot sectors

There are always new hot areas in a continually changing world. Big news may sometimes ignite a whole industry.

Focus on the hot sectors while trading breakouts. That is where you will discover the majority of stocks with the highest volatility and volume.

So far in 2021, popular industries have included electric automobiles, marijuana stocks, solar companies, and even meme stocks! Learn from the current flurry of activity to be prepared for the next hot sector.

Set limits

It takes time to learn breakout trading. You will have ups and downs. Set reasonable trading goals as well as boundaries on how much money you're willing to spend and perhaps lose while trading breakouts. You must have a trading plan and set trading limitations in a turbulent market.

Limiting your losses and increasing your earnings will aid in the development of your trading abilities. Remember that a tiny defeat can sometimes be considered a win.

Have a trading plan

Consider entering a breakout trade as if you were constructing a house.

If you want your house to be built exactly how you envisaged, you stick to the plan. Every decision you could make will be included in a strong trading plan.

It might contain things like what setups to look for and what kinds of stocks you want to trade. Then there are the signs you'll monitor, how much you're willing to risk, and how you'll plan your entrances and exits.

Stick to your trading plan no matter how volatile the markets become!

Conclusion

Breakout stocks are worth your effort and money. Breakouts can frequently occur during the day, so it is important to identify breakouts before jumping into the trade.