It’s been another choppy week in the market, to say the least. It seems like one-day stocks are up… the next they are down.
The outcome from U.S.-China trade talks will have a significant impact on the stock market…
That said, traders are reacting to every news headline and rumor they hear regarding trade.
But you know what?
I usually stay away from trading stocks that are so closely tied to trade talks and the overall economy. In fact, that’s one of the benefits of trading penny stocks. They often trade on their own island.
You see, on Monday, the Nasdaq (tech stocks) was down 1.46%, and the Russell 2000 (small-cap stocks) was down .70% …
However, many of my clients, including myself, saw green on the screens that day.
We stayed stock specific and focused on catalyst driven penny stocks that had high probability chart setups.
For example, we caught a nice one in CarSmartt (CRSM) for a +30% pop…
(Want to know the edge these traders have? Watch my webinar here)
(My $2K account is now up 40%, to find out how I do it, watch this)
Now, what’s really interesting about the setup in CRSM is that it was a breakout play. In other words, I was buying the stock at its highs…
… if ever read any book by the legendary value investors they will tell you this is the worst time to buy a stock.
However, we aren’t investing here … we are trading penny stocks for a quick flip… plus who knows where the top is anyways.
After all, a market inefficiency once made Volkswagen the wealthiest company in the world.
That said, while some traders are scared to buy stocks at their highs… I’m not. In fact, I’ve developed a method to trading breakouts that I’ve found to have great edge that I’m about to share with you.
Read on and learn why I wasn’t scared to buy CRSM at the highs, the psychology behind trading breakouts, and a lot more.
Table of Contents
Breakout Trades Can Be Lucrative
Breakout trades could be very lucrative.
However, you need to know the psychology of and thought process behind breakout stocks.
Now, I’ve figured out the psychology of trading breakouts and which indicators to use to time my small account. Now, that’s just one of the strategies I’ve used to build three small accountslast year – returning 220%, 275% and 600%… and I’ve realized so many traders are afraid to buy stocks for the breakout.
You see, the problem that many traders have with buying breakouts is the fact they don’t know the psychology of them… they get scared seeing a stock up 50% or even 100%… and they don’t think the stock could run any further.
Well, have you ever heard of Amazon.com (AMZN)?
That stock was $100 a while back… and people were scared to buy the stock… thinking “it’s up too much”, AMZN isn’t turning a profit yet… the market is overvaluing it and it’s extended… and they shouldn’t “chase the stock at these levels”.
You see, just cause a stock is “up too much” doesn’t mean you shouldn’t buy it…
Now, I have one question for you: Do you ever know when you’re not chasing a stock?
The quick answer: No.
Who really knows if you’re chasing a stock… stocks can run a lot further than we think… and you really don’t know if you’re chasing until after the trade is over. That said, as long as you’re indicators are telling you that the stock could run further… you shouldn’t be afraid to buy stocks that are up a lot (like 30% or even 100%).
You might be wondering, “Jeff, I get it… the whole idea is to not be afraid to buy breakouts… but how do I know when to buy them?”
Well, let me show you what I look at.
Technical Indicators for Breakout Trades
For me, it’s pretty simple. I’ll look for stocks breaking a new high – it could be the daily, weekly, monthly, 52-week, or all-time high… I don’t discriminate. Clearly, when a stock is breaking any high… there is new buying pressure – or confidence from investors… otherwise they wouldn’t be buying it.
Now, I don’t just look at the price action… I also look at other indicators like moving averages and volume.
For example, if I’m buying a stock for a breakout, I want to see the stock breaking those highs on volume.
Here’s a look at a recent breakout trade I had.
You see the green line there?
Well, that’s the 200-day simple moving average (SMA). Notice how SESN was making higher highs and higher lows. In other words it was trending higher.
Now, I was looking for the stock to break above that green line. As you can see, that’s a level where the stock has had a tough time staying above. In other words, there have been sellers at the 200-day SMA.
However, once the stock breaks above that… it’s probably going to continue higher.
That’s exactly what Sesen Bio (SESN) did the day after I bought the stock. Now, the stock trades around 2.4M on average… but the day it broke above that green line, there were 3.58M shares traded.
What did the volume tell us?
Well, it let us know there were buyers. Sure, I “chased the stock, after all it was up around 30% in just a few days… but that didn’t mean it wasn’t going higher.
You see, if you let the emotions get to you… thinking the stock can’t continue higher and could probably going to reverse… you would’ve missed out on that winner.
That said, when you focus on technical indicators and price action… you can remain disciplined and not let your psychology prevent you from making money on breakout trades.
Now, I’m not looking to make too much on these breakout trades… I generally look to capture anywhere between 10% to 20% of the move because I know these stocks can drop just as fast as they go up.
The other day, I actually traded a stock that was up over 100%… and made 30% in just under an hour.
Breakouts Happen Quick…
Here’s a look at CarSmarrt (CRSM) on the daily chart.
Sure, the stock was up around 100% when I bought it.
Was I afraid to buy it?
My indicators were all pointing to another leg up in the stock.
Now, I knew the 52-week high was at 13 cents… if the stock gets near that on volume… chances are it’ll run higher.
Again, when you’re trading momentum stocks – stocks that move very fast – you have to know your levels… because once the stock breaks above a high, it could run a heck of a lot more.
Again, there’s new buying pressure and confidence from traders, especially when a stock breaks above the 52-week high.
Here’s a look at what I was looking at.
The stock was going up on heavy volume… not only that, there was a bullish crossover in the Moving Average Convergence Divergence (MACD) – something we’ll save for another lesson… so I wanted to buy the stock at 13 cents, looking for continued momentum on that 52-week high breakout.
Keep in mind, this was a classic higher high and higher low trade for the past few months, so it was on my radar for a new high breakout for a while.
Well, I alerted clients about my trade in CRSM.
Now, within the same hour… CRSM built a lot of momentum off that 52-week high breakout… and it got all the way to 19 cents!
This stock was moving pretty quick… and generally, I like to take anywhere between 10% to 20% returns. However, so if it didn’t get to my price target that day… I would’ve been willing to hold it overnight.
Now, I took 30% in profits in under 45 minutes… just by understanding the psychology of breakout trades and not being afraid to take them… as well as using my indicators. If you want to receive real-time trade alerts like these or want to grow your account, click here to get started.
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