Using a chart for trading gives you so much information on the history and the potential future moves. Experience certainly matters. The best experts on chart analysis as many years of experience behind them.
In a chart reading, Volume and Price Action are key in finding the best entry point and exit points too at times.
In this post, we will look at:
5 TIPS ON PRICE ACTION FOR BREAKOUTS
Technical trading involves observation of price and volume. You are observing the supply and demand of a stock. Although fundamentals are important, technicals are much more important, I believe. Trading on fundamentals alone will guide you to high potential stocks, but you don't know when to buy or sell them. That's why knowledge in technical analysis is so important.
Here are a 5 tips about price action in a stock:
Volatility contraction
You should always aim to buy new, fresh breakouts. If the stock made a sudden big move before and without any kind of consolidation, wait! The volatility must contract and the stock must rest before the next up move.
Volatility contraction is visible in the chart if the price goes sideways for a few days to weeks. If you see a sideways range about 10-15 days and the daily price range decreases, observe the stock for a breakout. Also look at the volume: you want to see a dry up in the volume.
Strong price move on the day of the breakout
The buyers must establish clearly that they are in control. If a stock breaks out with a minor 1-2% move, that isn’t great, avoid it. You want to see 3-5% moves on strong volume.
I know it sound strange to buy a stock if it's already up 3-5%. But you want to see confirmation and not make a bargain. Strong gains and strong volume show demand. You don't want to own stocks that nobody wants to buy.
Avoid too large moves and gap ups
If a stock is already broken out and the gain >7%, avoid it and wait for another entry opportunity. DON’T CHANCE IT.
The reward-risk-ratio is too bad and the possibility for a pullback too high. Risk control is more important than profits. Wait for a consolidation over 1-3 weeks and buy the next breakout opportunity.
Price should go through the resistance level
The best way to buy a breakout is if the price goes through a resistance level. That means that the low of the day should be below the breakout level. Price starts inside the consolidation and then breakout to a new high.
For gap ups you want to see a similar behavior. A stock must gap up through a valid chart pattern with strong volume to a new high. Then it's buyable.
Expect a retest or base on base pattern
The strongest stocks break out and never retest the breakout line. Such strong stocks are rare. A lot of stocks retest their base after they broke out or build another base before they run higher. That often depends on the market environment. If that is weak, expect retests and base on base patterns.
Happy Learning and Successful Investing 🙏
Article source: Julian Komar