How to Identify Breakout Stocks: Momentum Surge

How to Identify Breakout Stocks: Momentum Surge

August 30, 2018 0 By Jeremy




How to Identify Breakout Stocks – Momentum Surge

If you have been following this blog for a bit now, you will know that I look for good rules-based trading systems.  I keep track of real-world performance for a few well known strategies like Global Value investing, the very well-known Dual Momentum system, and the 12% Solution.  I also have some other systems I trade personally using a very rules-based approach – all of those are summarized on my trading summary page.  In this post, I am going to talk about another one I use and explain how to identify breakout stocks.

On of my favorite sites to learn how to swing trade breakout stocks is Stockbee.  I have learned a lot from him, and many attributes of my momo surge system was learned from a number of his techniques.  Be sure to check his site out.

What are Breakout Stocks?

A breakout stock is pretty simple.  Many charts move in well defined patterns for a period of time, and then when good news comes in the stock breaks out of that range and moves upward quickly.

There are a few key attributes of a good breakout stock.  You will be able to see all of these in the rules I use which I will cover in a moment.

The more common attributes are a tight period or consolidation (i.e stock stays flat) for a number of days, heavy volume on the day of the breakout, a down or very narrow candle the day immediately prior to the breakout, and the breakout day was up at least 4%.

Here is what that would look like visually on one of my charts in TC2000. As you can see, there is heavy volume on the breakout day, consolidation before that, and a nice move up after the breakout.  These are the types of stocks I want to buy on that breakout and hold for a couple of days to capture some profits.

How to Identify Breakout Stocks Momentum Surge

How to Identify Breakout Stocks: Momentum Surge

As with any type of trading that is not long-term investing like the Coffeehouse portfolio, or even my own Supercharged Index Investing, the Momentum Surge system uses strict rules that govern when I get in and out of a stock.

Here are the rules I use in TC2000 to identify and then trade the momentum surge stocks I find.

  1. Ticker traded must be in an uptrend: must be trading above its 65 and 195 day simple moving average and has been heading higher over the past 50 days.
  2. Price > $3.
  3. Volume > 100,000 and volume > 30 day volume simple moving average
  4. Ticker had a 4% up day.
  5. Ticker has traded in a tight range over the past 3 days (TC2000 scan = ABS(C1 / C2 – 1) <= .015 AND ABS(C2 / C3 – 1) <= .015 AND ABS(C3 / C4 – 1) <= .015 )
  6. The candle prior to the breakout is very tight, or even closed down.
  7. Set position size as 1.0% of account with a 7% max loss.
  8. Set stop at 7% max loss.
  9. Exit on 3rd to 5th day depending on price movement and volume.

As with most trading success, simple is better and these are the only rules this system has.  That said, every stock identified by the scan will not be a good candidate.  I have to look at the chart to make sure that the stocks are great candidates.  For example, I don’t want to see a real choppy chart.  This system works better with a more stable stock, that goes up, consolidates, and then starts heading up again.

In addition, there may not be trades that are generated every day. In fact, there can be long stretches where signals are not generated at all. I also use other systems like my ETF scans with trading signals such as the Donchian system or the Bollinger Band Breakout.

As I find these setups and trade them, I will write about them on the blog.  If you want updates on when that happens, then please subscribe to the newsletter and I will let you know when those posts go up.

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