Before you start off Money Monday looking for a beautiful setup you think is gonna line your pockets with profits…
Ask yourself if you have an exit plan.
Because not every setup works out.
It’s the most frustrating part of trading…
To see a nice chart setup you think could run, and then it falls flat and leaves you with a loss.
It’s a move that can catch you off guard. And it’s something that happened to a few members in our chat room on Friday…
A recent multi-day runner went from red to green and broke out to new 52-week highs…
Then it completely collapsed with a nasty red death candle.
I want to help you avoid the same scenario.
So today I’m giving you my three specific criteria you can use to increase your chances of getting into the right trades and avoiding the wrong ones.
Let’s dive in!
Three Things To Look For To Avoid False Breakouts
Buying breakouts is a popular strategy for new traders because it’s easy to spot on the chart.
But they don’t all work.
GSI Technology, Inc. (NASDAQ: GSIT) was a great example of a false breakout on Friday.
So I’ll give you my three criteria that can help you avoid these tricky plays, and I’ll show you why GSIT was destined to fail…
Volume
First and foremost, let’s talk about volume.
Price action is essential, but volume is a close second. When buying breakouts, look for high volume.
Even if a stock is at multi-week, multi-month, or multi-year highs, if the breakout lacks significant volume, it may struggle to sustain its move.
GSIT had volume around the time of the breakout…
GSIT chart: 2-day, 5-minute candle — courtesy of StocksToTrade.com
But you have to look at the big picture — the average volume and the daily volume relative to the float.
On Friday GSIT only traded around 5.5 million shares. And while that’s above its 60-day average, it’s nothing compared to the volume it traded recently.
On May 14 it traded over 100 million shares. And the next day when it broke above the previous day’s high it traded over 80 million shares.
The five million shares it traded on Friday weren’t even enough to rotate the float.
The stock market thrives on mania and demand. So focus on stocks trading significantly high volume relative to the float to ensure there are enough buyers to support the move.
News
Don’t overlook the power of having a news catalyst behind a breakout.
A stock might have a beautiful chart, but without substantial news, the potential for continued momentum diminishes.
Look for concrete news catalysts such as earnings, big-name contracts, or new products or treatments.
On Friday, GSIT had no news, which is probably why it also lacked volume.
You want to buy stocks that have a reason for more buyers to come in and be willing to pay any price for the stock. That’s how it can continue to go higher.
SIT chart: one-month, 5-minute candle (no after hours) — courtesy of StocksToTrade.com
In addition to high volume and news, it’s even better if the stock is in a…
Hot Sector
Try to avoid buying breakouts in stocks that aren’t in a hot sector.
The stock market is ever-evolving, presenting new themes and opportunities every day.
Aligning your breakout plays with hot sectors maximizes the chances of the pattern working.
Whether it’s low floats, biotechs, or artificial intelligence stocks — find the buzzing hot and focus your efforts there.
GSIT is in the hot artificial intelligence sector, but matching up a stock with one criterion isn’t enough.
You need to check multiple boxes and align all the criteria to put the odds in your favor before you place a trade.
These are just three simple boxes you can check before entering a stock that’s breaking out.
Other things you’ll want to consider are what time of day it is, and what the long-term chart looks like.
If you want to stay on top of what’s happening in the market and what plays I’m watching — tune into my Market Update videos three times per week.
Have a great Money Monday, everyone. See you back here tomorrow.
Tim Bohen
Lead Trainer, StocksToTrade