Most investors will be able to pinpoint a stock where they wished they had got involved earlier in before the price went skyward, but the key to making money out financial markets is often about foresight rather than hindsight.
When you visit Money Morning on a regular basis, you will be able to keep track on the progress of all of your stocks and check the progress of your portfolio. What would definitely help push the numbers firmly into the black is when you manage to identify some stocks to buy, before they break out of the gate.
Tapping into the momentum
Potential breakout stocks are understandably always going to be on the radar for many traders and the key to making money out of these plays, is to try and acquire the stock at a price where the real momentum is just starting to kick in.
The problem for everyone wanting to find these opportunities, is how to identify them.
Momentum stocks have the potential to earn you some decent profits, provided you are able to demonstrate good timing with your stock purchases, and one way of identifying and then tapping into this momentum, is to use filters to see which stocks are showing the classic signs of promise.
One example of how you might do this, would be to use some trading software to filter out stocks which are approaching their thirty or sixty day high or low. What you potentially get when you use filters in this way and using other similar criteria, is a list of stocks that may be gathering momentum in their price, but have yet to hit a point where the price has peaked.
You will almost certainly need to play around with these filters in order to identify the sort of search criteria that is most successful, but once you have found a way of short-listing potential stocks to trade that are gathering momentum, you can then save this criteria as a custom filter, allowing you to pull up a list of potential trades whenever you want to.
Finding a pattern
You could argue that successfully identifying breakout stocks is a strategy that requires an equal application of skill and technical analysis, as it is a potential way of making money that is both an art and a science.
One of the favored ways of approaching this task for some traders, is to try and see a distinct pattern that will give you a big clue as to what the stock is about to do next.
One aspect of the stock price history to look at is to see if you can spot a strong inside day pattern. This is a relatively simple pattern where the stock has three consecutive days where there is a progression and the price is inside of the previous day.
This sort of mini-triangle pattern when you see it on a chart, tends to occur more frequently at the end of a stronger trend phase for the stock. This could be the point where the price is taking a bit of a pause before pushing on again, and therefore offers an excellent entry point if you spot this pattern and get your timing right.
There is always the potential for a single pattern to throw the odd curve-ball and fool you into thinking that there is something positive there, when perhaps this isn’t the case.
It is for this reason that some of the best setups can often turn out to be combination patterns.
What this simply means, is a scenario where two particular patterns occur at the same time, potentially giving you an extra little safeguard that what you are looking at is right. When two patterns align it should increase the level of probability of trades working out right for you.
Some traders like to try and find a 52-week high and ascending triangle pattern, which will give you a good level of data to make it more possible to spot a strong up trend and to also see where the potential buy breakout threshold might be.
Improving your odds
There is obviously no guaranteed system or strategy that will only find you winners every time, or we would all be doing the same thing, but if you can find ways of increasing the probability odds, you are also improving your odds of making a profit on your chosen stock.
There is often a strong correlation between how the stock market is performing in general and individual stocks, giving you an indication of potential momentum.
If you can find a way of identifying stocks on an upward curve and get in while they are still heading upwards, that would certainly be a solid trading strategy.
Editor’s note: This post was contributed by Louis Rowley who takes an interest in investments, trading stocks and shares as well as investing in real estate to secure his future. He writes for finance / investment blogs when an idea for an article pops into his head.