Breakout Trade 05/12/2009 Using FAS

You'll find an example of an intraday breakout trade I made from 05/12/2009 using FAS. In fact, As I started writing this article, I just made another breakout trade using the FAS, so this page will have two examples.

I have included charts and my reasoning behind my entry and exit points that I used. The examples are from quick trades that lasted less than 5 minutes each, which is the type of trading I usually do.

The same techniques can be used on larger timeframes for longer duration trades with minor adjustments to position sizing and stop loss points based on your specific trading guidelines. These will be discussed on separate pages.

The first chart below shows where I entered a trade using FAS 8:01 a.m at $10.82. Prior to entering this trade I was watching this and other related charts as I always use multiple charts to confirm a directional move before entering a trade.

Breakout Trade 1

What I mean here is that before entering a trade using FAS I will make sure I see similar moves in charts like XLF, BAC and also general market direction using SPY and DIA. The more charts I see moving the same direction, the better. If several or all of the other charts are moving the opposite direction, I will not enter the trade.

Since this was a Pre-market trade, there is much more risk due to the lower volume and higher chance of price manipulation that comes with lower volume.

Usually, looking at Volume can also help you to confirm strength and weakness in the trades being executed, but since this was in Pre-market, the volume must be looked at with much more caution. After all, what volume can you accurately compare it to if volume is lower than regular trading hours?

If you look at the volume increase at 8:00 a.m., you would initially think this is a good sign. But since this is also when a lot of traders start trading (many due to trading platform limitations), you really cannot compare it to the prior minutes.

So what I did was wait until the large amount of orders went through at 8:00 a.m. and then waited for a breakout from that particular bar, in this case 8:01 a.m. Once the price started to move higher, I confirmed the move higher on my other open charts and then I entered my position.

Many times high volume bursts of trades are often followed by reversals. To help minimize possible losses, when entering a breakout I always use a stop loss just below the bottom of the breakout pattern immediately before the breakout. In this case, $10.65-$10.68. This allows you to have an exit point in case your reasons for entering the trade turn out to be wrong. In this case I was expecting to catch a breakout trade move higher.

Since I am a very short term trader most of the time, I typically will use an initial profit target is 1% per trade. If I hit that level in a few minutes, I sell and close my trade. I am happy with being able to make 1% in a few minutes as I know there will be other trading opportunities to come.

For those intraday traders who move in and out of trades several times a day, or who may have missed the first trade above, you can see on the next chart below that a Symmetrical Triangle can be observed from 8:02 a.m. to 8:09 a.m.

Symmetrical Triangle Breakout

Had you been following this stock chart and recognized the pattern, you could have entered a trade on the breakout from the Symmetrical Triangle and had another profitable trading opportunity using a possible stop loss below the exit of the pattern near $10.85.

At 10:40 a.m. I took another look at FAS and the chart below shows what happened since my previous trade above:

Breakout Trade 3

I noticed a higher low had formed on this intraday chart and looked at my other charts and confirmed the same pattern. Some of the other charts had higher lows and some had formed double bottoms and were turning up. I decided to enter another possible breakout trade at 10:42 a.m. at $9.69.

Using my same 1% profit target I was looking for a move up near $9.79 on a breakout trade within minutes if possible. There was also a near term reversal off a resistance level at $9.79 at 10:36 a.m. so this was my target area.

At 10:47 I was able to get out at $9.79, 5 minutes later. You can see on the chart that the price wound up going through this level after I got out, and moved to the next near term resistance level of $9.90 before pulling back a little again.

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