Nearing breakout
Stocks which are near to the pivot point(<5% range) and upon crossing that pivot, they have high pot...
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What are Breakouts In the Stock Market?
A breakout in the stock market is the price level at which a company’s share crosses above a resistance level or below a support level. Basically, a breakout occurs when a share's current price breaks an ongoing trend and shows signs of a reversal.
Breakout levels are crucial for share market traders to enter and exit trades at the right time. Traders track the prices of targeted shares relative to the resistance and support levels to catch breakout levels timely. This trading method helps traders cut their losses in case of a negative breakout (when the price crosses below the support level) or earn a substantial return from a positive breakout (when the price crosses above the resistance level).
However, it is important to note that breakout levels do not necessarily mean that the stocks will sustain the new trend. Trading breakout stocks can be risky because false breakouts are also prevalent in the market. False breakout refers to a situation when a stock provides signals for trend reversal, but the new trend is corrected in the old direction, leaving traders with surprises and losses in many cases. To avoid trading with false breakout levels and losses, traders must use other technical indicators along with breakout levels of stocks.
- Breakout is a price level at which a stock crosses a support or resistance level, signalling a possible trend reversal.
- Traders use breakout or nearing breakout stocks to gain good returns from early trend changes.
- However, trading stocks based solely on breakout levels due to false signals.
What are Nearing Breakout Stocks in The Share Market?
Nearing breakout stocks is a term referring to those listed shares that are near their breakout levels or pivot points. These stocks are closely watched by traders to judge the future price momentum of a stock and to create trade setups and strategies. Tracking nearing breakout stocks is quite helpful in catching early trend reversals and entering and exiting the market at the right time.
Traders prefer tracking the resistance, support, and volumes along with technical indicators to identify nearing breakout stocks. All the mentioned mechanisms and tools help monitor the upcoming price movements and trends of stocks.
The primary objective of identifying and nearing breakout stocks is to catch early market correction or upward trends. By doing so, traders are able to generate better returns on their invested capital and contain the risk.
- Stocks that are near their breakout levels are called nearing breakout stocks.
- Identifying and trading the nearing breakout stocks enables traders to earn substantial returns early.
Key Indicators to Identify Nearing Breakout Stocks
- Relative Strength Index (RSI) - Relative Strength Index (RSI) is a technical indicator that tracks the strength in a stock's price movement and indicates overselling and overbuying. When the RSI value is above 70, it indicates overbuying; when it is below 30, it indicates overselling. These RSI values are compared with the corresponding price levels, and if there is a divergence or opposite movement between them, a breakout is expected in the stock.
- Moving Averages - Moving averages like the 50-day moving average and 200-day moving average are used extensively for identifying nearing breakout stocks. Both of these averages are used simultaneously, and traders expect a stock breakout when the averages are near each other, indicating an intersection. Typically, when the 50-day moving average crosses above the 200-day moving average, the stock is poised for a positive breakout. Similarly, when the 50-day moving average crosses below the 200-day moving average, a negative breakout can be expected.
- Bollinger Bands - Bollinger bands are also a technical tool that helps to identify oversold, overbought, and potential breakout stocks. Like the RSI indicator, the Bollinger bands also work based on a range. It means that when the price of a stock moves outside the upper or lower band, it indicates a possible breakout and trend reversal.
How To Trade Nearing Breakout Stocks?
- Identification of nearing breakout stocks - The primary step to trade nearing breakout stocks is to monitor a set of targeted stocks that are nearing their breakout levels. Technical indicators like the RSI and moving averages can help you identify these stocks.
- Choosing the right time frame - You must choose the right timeframe to trade nearing breakout stocks successfully. It is important because short-term time frames increase volatility and risk levels. Thus, if you are not a day trader and choose a small time frame, such as 5 minutes or 1 minute, the excessive price volatility might overwhelm you and cause you to make wrong decisions.
- Right entry and exit - The third and one of the most important steps is to enter a trade at the right time and, more importantly, exit it at the right levels. Thus, when trading nearing breakout stocks, traders must ensure they are not buying stocks after a reversal has sustained for a long time. This is because late entry leads to a resultant late exit and increased loss probability.
- Risk minimisation - To minimise the risk while trading nearing breakout stocks, traders must use the stop loss order. It is an order that is used to set a price below which traders don't want the stock price to go. As the name suggests, it stops unnecessary losses by liquidating positions automatically on the stop loss price or below it.
Risks of Trading Nearing Breakout Stocks
- False Signals - Stocks nearing breakout levels often provide false signals of a trend reversal due to various factors. Thus, when traders are not able to identify a fake breakout opportunity, they face losses.
- Wrong Entry and Exit - When shares are nearing their breakout levels, traders are often clouded with excitement and make early entries without confirmation. Also, the fear of loss makes them take early exit at the wrong price levels. In both these cases, traders lose potential gains they might have earned if they had not taken entry and exit at the wrong time.
- Not following trading strategy - Before entering into a trade, every trader forms a trading strategy they wish to follow throughout. However, when a nearing breakout stock starts deviating from the expected breakout levels, traders often diverge from their strategy, which increases the risk percentage.
Key Takeaways On Nearing Breakout Stocks
- Breakout is a crucial price level in the stock market. Breakout in stocks tells traders that a stock might change its direction and can move in the opposite trend.
- Nearing breakout stocks are those that will enter a breakout level in the near term.
- Traders use technical indicators such as the relative strength index, moving average, and volume oscillators to identify nearing breakout stocks.
- Nearing breakout stocks also have a set of risks that traders must be aware of before trading these stocks.
FAQs
What is the meaning of nearing breakout stocks?
Stocks that are close to breaking a resistance and support level while indicating a possible change in the current price trend are called nearing breakout stocks.
Are nearing breakout stocks good for investment?
Yes, nearing breakout stocks can be good for investment because they can provide an early indication of a trend reversal, offering an opportunity to enter and exit timely. If you wish to invest in nearing breakout stocks, ensure that you use suitable technical indicators and investing strategies.
How can I find nearing breakout stocks?
You can identify nearing breakout stocks using technical indicators like the Relative Strength Index (RSI), Volume Oscillators, and Moving Averages (MAs). Stock screeners are also useful tools for accessing a nearing breakout stock list for easy identification and investment.
What are resistance levels?
Resistance levels are the price points of a stock that it has been unable to breach because of selling pressure from sellers at those levels. It can also be understood as a cap price set above the current market price of stocks. This cap price or resistance levels are formed when sellers do not allow the stock to breach a certain price level or range in a particular time frame.
What are support levels?
Support levels are the exact opposite of resistance. These levels indicate those price points or floor prices below which the buyers are not allowing stock to fall.
What is the best time frame to trade nearing breakout stocks?
The time frame to trade nearing breakout stocks depends on the trading preferences of traders. Usually, intraday traders use 5-minute, 15-minute, or even 1-minute time frames, and other traders may use the weekly or daily time frame to trade nearing breakout stocks.