Looking for a better breakout strategy? Try this…

One issue many traders face when looking to buy breakouts is how to handle
stocks that are extended on an intraday basis. In other words, the daily or
weekly chart may be breaking out, but the 5-min or 15-min chart appears extended
and primed for a pullback. Do you just jump in, or do you wait for a pullback
and risk having the price completely run away? While there is no true correct
answer, the best breakouts will offer more than one opportunity for entry. Let’s
look at an example from today:

Neoware
(
NWRE |
Quote |
Chart |
News |
PowerRating) had been basing for nearly two months and put in a nice,
low-volume handle last week. It broke out nicely above that handle today.

On an intraday chart you can see that the stock had already run up about 4% in
the 5 or 10 minutes preceding the breakout. If this caused you to hesitate and
miss the entry (or if you were away from your desk and missed it), a second
opportunity could have easily been taken by closely monitoring the intraday
action – in this case, a breakout of the consolidation between $28.14 and
$28.44.

When entering based on an intraday pattern like this consolidation breakout, you
should also set your initial stops based upon that pattern. If you used a stop
below the consolidation you’d only be risking $0.30 or $0.40. This means a
somewhat larger position could be considered than you may have been considering
with the intermediate-term stop. After the position moves in your favor, you
could then take profits on a portion of your shares and use the remaining as an
intermediate-term position. The profits taken on the short-term portion will
then help to reduce the cost of the intermediate-term position.

Best of luck with your trading,

Rob