This article is for momentum traders, CAN SLIM traders, and Darvas Traders. Trading break out stocks is a great way to make money in the right up trending market with the right stocks. Apple and Google are up to their old tricks, taking over whole markets and laying waste to competitors. Their charts are just amazing. If Google and Apple do not make new all time highs then I just don’t know of any stock that ever will. Their technicals and fundamentals are lining up like only a monster stock can.
But always manage your risk through correct positions sizing and only trade this style if it is comfortable for you.
Here is how the greatest momentum trader of modern times recommends playing momentum stocks:
DAN’S 10 GOLDEN STOCK RULES
In addition to these 10 rules, please see notes below:
1. Make sure the stock has a well formed base or pattern such as one described on this web site and can be found on the tab ‘Understanding Chart Patterns’ on the home page, before considering purchase. Dan highlights stocks with these patterns in his newsletter.
2. Buy the stock as it moves over the trend line of that base or pattern and make sure that volume is above recent trend shortly after this ‘breakout’ occurs. Never pay up by more than 5% above the trend line. You should also get to know your stocks thirty day moving average volume, which you can find on most stock quote pages such as eSignal’s quote page.
3. Be very quick to sell your stock should it return back under the trend line or breakout point. Usually stops should be set about $1 below the breakout point. The more expensive the stock, the more leeway you can give it, but never have more than a $2 stop loss. Some people employ a 5% stop loss rule. This may mean selling a stock that just tried to breakout and fails in 20 minutes or 3 hours from the time it just broke out above your purchase price.
4. Sell 20 to 30% of your position as the stock moves up 15 to 20% from its breakout point.
5. Hold your strongest stocks the longest and sell stocks that stop moving up or are acting sluggish quickly. Remember stocks are only good when they are moving up.
6. Identify and follow strong groups of stocks and try to keep your selections in the these groups
7. After the market has moved for a substantial period of time, your stocks will become vulnerable to a sell off, which can happen so fast and hard you won’t believe it. Learn to set new higher trend lines and learn reversal patterns to help your exit of stocks. Some of you may benefit from reading a book on Candlesticks or reading Encyclopedia of Chart Patterns, by Bulkowski.
8. Remember it takes volume to move stocks, so start getting to know your stock’s volume behavior and the how it reacts to spikes in volume. You can see these spikes on any chart. Volume is the key to your stock’s movement and success or failure.
9. Many stocks are mentioned in the newsletter with buy points. However just because it’s mentioned with a buy point does not mean it’s an outright buy when a buy point is touched. One must first see the action in the stock and combine it with its volume for the day at the time that buy point is hit and take keen notice of the overall market environment before considering purchase. Are stocks moving briskly or are they acting sluggish or even worse, are we in a hefty sell off.
10. Never go on margin until you have mastered the market, charts and your emotions. Margin can wipe you out.
Stocks that breakout and move up with tremendous volume and close near the highs of the day seem to work out best. However many stocks that move up 15% or more on breakout day often fail. You’ll just have to watch your stocks action like a hawk and get to see and understand these things over a long period of time. If trading were easy everyone would be making millions. It’s not; it takes years and years of hard work and long hours.
Many traders employ a half hour rule, meaning that for the first half hour of the day many traders do not buy any stock that gaps up in price. If the price holds after the first half hour then often many traders will step in a buy the stock. I find this rule works good after the market has moved up for few strong weeks and is not very effective at the start of a new strong move.
If it’s earnings season then it’s an absolute must that you know the date that your company reports its earnings. Many traders prefer to be out 100% before a company reports its earnings in case the company misses its earnings or guides lower. Others I know reduce positions substantially before earnings are released to lower risk. The choice is up to you. You can see an earnings calendar on this web site by clicking on the icon Useful Stock Recourses. Please verify this information by calling the company or visiting the companies website which you should be able to find in any search engine.
*The market moves in waves that can last anywhere from weeks to months. Then a correction or setback starts, which can last anywhere from 5 to 8 weeks or even as long at 4 to 6 months. If you are starting a free trial and are a novice you may be lucky to join just as the market gets underway, in which case you will see the full power of charting. If however you start after the move has been going for sometime then things won’t look as good as traders are paring down positions. Or even worse the market could be selling down hard and working off the prior up move in which case you will be completely discouraged. The power of charts is though waiting for the correction to end whereby the chart patterns will then be fully developed. After weeks of base or pattern building, stocks will begin to lift off and that’s when the big rewards come in. The question is, are you willing to wait and be here for the start of the next big move? The biggest mistake a novice can make is to come back after a move has started.
Dan Zangers web site chartpattern.com Dan Zanger on twitter