What Is a Break Out Strategy During Swing Trading Volatility?
Technical analysts in stock trading study charts of previous price movements, attempting to forecast likely future moves. The price break-out strategy with high volume is a fundamental technical analysis trading technique. It can be used effectively in swing trading to capture profit from a short-term price movement but often results in several small losses before achieving a substantial profit.
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Identification
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Technical analysts watch for particular chart formations that signal good opportunities to buy and sell. One pattern they monitor is stocks that have been trading in a narrow channel or consolidating into a triangle shape. When the price breaks out to the upside, this signals a buy opportunity, and when it breaks out to the downside, a chance to make profit on a short sale. Either way, high volume is important to create enough momentum for a large move.
Significance
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A swing trader is only concerned with the short-term price action, not with a long-term trend or any company fundamentals. With the break-out strategy, he or she is looking to capture a movement that will probably last 2 to 4 days.
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Types
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The least risky entry strategy for a break-out volatility trade is to wait for a price pullback. For instance, if the stock price has been in a channel between approximately $10 and $12 for a certain time frame, then bursts to the upside to $14 with high volume, the patient trader will wait for a retracement to the $12 resistance level. Resistance is the price that the stock had previously been unable to break through. This strategy allows for a greater profit, with the trader picking up the $2 difference rather than buying higher at $14. It also decreases any loss involved, because if momentum diminishes and the break-out does not follow through, traders can sell in the channel range without the extra $2 loss involved if buying at $14.
Features
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The problem with the first strategy is that momentum movements often do not retrace at all. If the trader does not buy at the break-out, the trade may get completely away, with the price shooting up to $16 and then $20 and no place for entry. The more experienced trader might buy at the break-out and set an exit point just below the line of resistance, in case the price move does not follow through.
Features
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The swing trading break-out volatility strategy is not particularly reliable, and traders must have a great deal of confidence to withstand several small losses while waiting for one highly profitable trade. They must not be swayed by anxiety and fear while dealing with big price moves whipsawing back and forth, that may dump them out more than once in the attempt to find a good ntry point. This volatility, however, often provides enormous price moves in one direction. Professional traders advise that novices work with this strategy in a simulated system for at least several months before trying it for real.
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