How to Buy Stocks on Breakouts 

Content Details 

• Summary: This article provides a detailed guide on buying stocks during breakouts from well-formed bases or patterns. It emphasizes the importance of volume confirmation, setting purchase limits, and understanding the stock's thirty-day moving average volume. Practical examples and strategies are included to help traders effectively identify and capitalize on breakout opportunities. 

• Target Audience: Intermediate traders with a basic understanding of technical analysis and looking to refine their breakout trading strategies. 

Expanded Response for Trading Hub Analytics 

Quote: "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 stock's thirty-day moving average volume, which you can find on most stock quote pages such as eSignal's quote page." 

Expanded Response: 

• Definition: Buying on a breakout involves purchasing a stock when its price moves above a resistance level, typically marked by a trend line, signaling the start of a potential upward trend. Volume should confirm the breakout by being higher than the recent average. 

• Stages: 

• Identify the Pattern: Look for a well-formed base or pattern, such as a cup with handle, head and shoulders, or triangle. 

• Draw the Trend Line: Identify and draw the trend line along the highs or lows of the pattern. 

• Wait for the Breakout: Monitor the stock for a breakout, where the price moves above the trend line. 

• Volume Confirmation: Ensure that volume increases significantly above the recent trend following the breakout. 

• Purchase the Stock: Buy the stock as it breaks out, ensuring you do not pay more than 5% above the trend line. 

• Monitor the 30-Day Moving Average Volume: Keep track of the stock's 30-day moving average volume to gauge trading activity and confirm trends. 

• Example in SPX: Suppose SPX is trading at 4400 and forms an ascending triangle with a resistance trend line at 4450. If SPX breaks above 4450 with a volume spike higher than its 30-day moving average volume, this could signal a buy opportunity. Ensure the purchase price does not exceed 5% above 4450, so the maximum buy price should be 4672.50. 

• Practical Application: 

• Trading Strategy: 

• Identify the Trend Line: Draw the trend line on the chart pattern. 

• Volume Check: Ensure volume is higher than the recent trend immediately after the breakout. 

• Limit Order: Place a buy order within 5% above the trend line to avoid overpaying. 

• Track Volume: Use platforms like eSignal to monitor the 30-day moving average volume. 
  Risks: 

• False Breakouts: Can result in buying at a peak before a reversal. 

• Volume Spikes: May be temporary and not sustainable. 

• Indicators for Identifying and Trading Breakouts: 

• Volume Analysis: Confirm breakouts with volume spikes. 

• 30-Day Moving Average Volume: Monitor to understand average trading activity. 

• Trend Lines: Draw accurately to identify breakout points. 

• Relative Strength Index (RSI): Check for overbought conditions.