Some basic rules to follow while trading these Breakout, Breakdown patterns:
1. It's a good idea to avoid entering new positions the first 15 minutes of the market open.
2. Only trade breakouts that have excellent volume % relative to its 60 day volume average. I generally only trade breakout stocks that exceed their 60 day moving average. Some programs like Medved Quote Tracker already do this for you. The 60 day moving average can also be found on Yahoo Finance under detailed quotes. Trading breakouts with big volume % greatly enhances your chances for a successful trade. This is especially true when Day Trading or Swing Trading. (Please note that when shorting, stocks can fall with there own weight. Volume is not as important when shorting.)
Here is a simple formula that I use to decide how the volume % is acting during the day:
[ total volume / hours into the trading day ] multiplied by 6.5 ( trading hours in a day )
You then compare your result to the 60 day average daily volume for the stock.
Stock ABC has a breakpoint of $10.25 with a 60 day average volume of 500,000 shares. At 11:30 eastern time, stock ABC broke the $10.25 price resistance (breakpoint) and there has been 100,000 shares traded so far.
Should you go long this breakout stock since it has broken the $10.25 resistance? The answer would be NO, because by using the following formula, the adjusted volume is only 325,000 shares, which does not meet or exceed the 500,000 share 60 daily average volume.
100,000 / 2 = 50,000
50,000 x (6.5) = 325,000
3. Do not hold a position into earnings as this can cause major losses. True if earnings are good it can provide significant gains but is it worth it? My experiance is no, it isn't worth it.
4. Do not overweight your $$ into one position. It is a good idea to keep minimal $$ in one particular position.
5. Do not enter a position early. Wait for a pattern to setup, make sure it has excellent volume %, then only enter after the price has traded through the breakout price.
6. It's a good habit to sell 1/2 your position on the initial pop and reset stops at entry to ensure a profitable trade. Always use stops as they help avoid disasters. Avoid averaging down if a position goes against you. Maintain proper stops and realize that if the stock comes back up one can always reenter.