| The following
strategy outlines the technique of buying stocks on
technical breakouts. Although this is one of the most
basic investment strategies, we found the need to
outline it for the less experienced investor who may
be buying into a stock for the wrong reason. Many
times, if you ask a new investor why they got into a
stock, the answers can be quite unbelievable: " I
like their food, I shop in their stores, a friend told
me it would take off, etc." If you are buying a
stock for any of these reasons, you might as well hang
the financial section of the newspaper on the wall and
throw darts at it. If by chance you happen to make
money on this type of trade, trust me you were lucky
and chances are that the stock gods will take the
money away from you on your next trade. Investing is
serious business, and if your going to put your hard-earned money into an investment you had
darn well
better be basing this decision on a technical or
fundamental characteristic of the stock and not on a
prediction from the guy down the block. The next time
the guy down the block recommends a stock to you, ask
him how much money he put into it and why exactly he
thinks it’s worth buying. Chances are that his
answer will be something like this: oh, I seen it in a
chat room; or oh, gee’ a friend told me it was a hot
stock. We will give you a hint at this point, the Wall
Street professionals don’t buy stocks because their
neighbors told them to, and they don’t buy stocks
because they like the food the restaurant serves. They
buy a stock because they have done the homework and
the stock is doing something they like (i.e. making a
breakout). If you want to be successful at anything in
life, you need to learn to imitate those who are
already successful.
One simple strategy that
beginner investors can practice is the technique of
buying stocks on breakouts. We like this technique for
a beginner because it’s easy to comprehend and
it’s a strategy with entry and exit points that are
easy to establish.
Step
One: Find a large group of potential stock
candidates:
we would recommend that you stick with the big names.
Select stocks with names that you are familiar with;
do not risk your money on speculative stocks. Some
smaller stocks trade a minimal number of shares and
for that reason can experience extreme volatility. A
good place to start would be the stocks that make up
the S&P 500 or NASDAQ 100.
Step
Two: The next step is to begin
scanning the charts of these stocks and narrowing down
your list of potential candidates. You will want to
look for a stock that in the past has shown strength
but is currently experiencing a consolidation phase.
This consolidation phase can be identified by a chart
pattern showing the stock trading sideways within a
range. You will want the sideways pattern to be
organized with no violent swings to the up- or downside. The highs of the trading range should approach
the high that the stock hit while it was in its
uptrend. The example shown below is daily chart of
Apple Computer (AAPL) in July and August 1999.
You will notice that the stock traded sideways for an
entire month while consolidating its gains from the
month before.
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