Identifying High Probability Breakout Stocks
Finding breakout stocks is both an art and a science. Traders rely on visual analysis as well as technical indicators to help them find high probability set ups that produce less false breakout signals.
Today I’m going to show you a few patterns that are currently setting up in today’s market environment so that you can see by way of example the type of set ups that we are looking to trade in the coming weeks. Keep in mind that these are not trade recommendations but a visual analysis of set ups so you can see how we visually analyze stocks when they are setting up.
Inside Day Pattern
The first pattern is a bullish inside day pattern. The pattern is a simple short term pattern that has three days that are inside of each previous day.
The pattern looks like a mini triangle pattern and occurs frequently after a strong trend comes to a temporary pause for a few days. What I like about this pattern is that it provides a low risk entry opportunity for traders because the volatility and the length of the trading bars is greatly reduced from the normal day to day volatility of the stock.
This provides a good low risk entry area without having to incur excessive risk due to extended volatility which causes extended trading range and more risk to the position. You can see in this example how MDCO is still in a strong uptrend and is consolidating temporarily. The stock looks like it will continue moving to the upside in the near future.
Look For Subtantial Reduction Of Volatilty During The Inside Day Set Up
Tail Gap Down Pattern
Traders who follow my tutorials know that one of my favorite stock patterns is the Tail Gap Strategy. I wrote several tutorials on this strategy and I recommend you review them at MarketGeeks.com or our video channel.
The strategy is a pullback away from the main trend that is accompanied by a gap. You can see several tail gap pattern set ups in this example of Sands Hotel stock. Notice that I’m only taking long tail gap trades because the long term trend is clearly up.
The tail gap set up usually lasts just a few days because I want to see the stock go back quickly in line with the trend. A reduction in volatility and trading range is not what I want to see after the set up is triggered with this set up. I like to see the stock get back in line with the trend within a few days of triggering the set up. You can see in a few examples on this chart how the stock falls very quickly back in line with the trend after trading higher after the set up is triggered.
Notice How The Stock Comes Back In Line With The Trend After Each Set Up
52 Week High And Ascending Triangle Pattern
Some of the best set ups are combination patterns, meaning two patterns occur at the same time. This increases the probability of trades working out even further, especially if both patterns have no conflicts between them. In this particular case we have a 1 year high breakout coupled with an ascending triangle pattern.
Notice how the stock tried to break above the resistance area several times before. The trend is strong and everything technically points to increase in price for this stock. When multiple trades and set ups line up with each other it truly creates the best type of environment for short term trading.
Finding Multiple Setup On The Same Stock Increases The Odds In Your Favor
Other Ways To Increase Your Probabilities
When analyzing stocks for high probability entry set up’s, make sure to analyze the underlying sector and make sure the majority of the stocks in that sector are pointing in the same direction as your set up pick.
Moreover, make sure the stock market is also pointing in the same direction as your picks because as you know there is a very strong correlation between the stock market and individual stocks. Many failed trades could be avoided by following these two basic principles and using solid trading set ups as well.