How to Identify Breakout Stocks: Momentum Surge

How to Identify Breakout Stocks: Momentum Surge

August 30, 2018 0 By Jeremy


How to Identify Momentum Surge Stocks

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 momentum surge system was learned from a number of his techniques.  Be sure to check his site out.

What are Breakout Stocks?

A momentum surge 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 momentum surge stocks.  You will be able to see all of these in the rules I use which I will cover in a moment.

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 Momentum Surge Stocks

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 have good momentum.  The best trades are at the start of a new momentum phase.
  2. Price > $7.99.
  3. Volume > 100,000 over the past three days.
  4. Stock has not been up three days in a row.
  5. Stock has had a nice linear uptrend prior to a consolidation phase.
  6. Is currently in a tight, low range, consolidation phase.
  7. Stock has not had a 4% breakout or breakdown during the consolidation phase.
  8. The most recent candle is very tight, or even closed down.

The entry price is at a logical break above the consolidation period.  I don’t wait for a big breakout; a $0.10 – $0.20 breakout above the consolidation is enough.

I set the stop based on the number of shares I want to purchase.  Most of these Momentum Surge trades are in the $5,000 to $6,000 range and the most I want to risk is about $100 – $150 per trade.  The initial stop is determined by calculating what stop price would allow me to risk only the $100 – $150 per trade (around 2%).

These tight stops are critical.  The stocks will either breakout or they don’t.  If they are not going to breakout then I want to get out as soon as possible; as soon as there is any sign of it going in the wrong direction.  However, when they do breakout the gains will be much larger than these tight stops.

Keep in mind, that this type of strategy requires a high number of trades.  This is a numbers game; you want to select the best setups you can, buy them when they start to breakout, and ride them as long as you can.  Many will fail, hence the tight stops.  However, as I mentioned above the gains are typically larger than the losses.

If the stocks start to head higher, trailing stops are used to protect profits.  I never want to turn a gain into a loss.

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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