Trading breakout stocks is when investors take a position during a trend’s early stages that can offer expansions in volatility and limited risk on the downside.
When a stock experiences a breakout, its volume increases and the price moves outside the support or resistance level.
And the main reason why breakouts are so important is because they allow traders to setup a starting point for future volatility increases and major price trends or swings.
Now, when trading breakout stocks, it’s crucial to understand the underlying stock’s support and resistance levels. For instance, the longer support and resistance levels are, the more important or valid the stock becomes.
In this article, I want to show you how to trade the breakouts and more specifically Cara Therapeutics (CARA).
Cara Therapeutics is a top performing medical cannabis stock that has been public since 2015 and focuses on providing treatment to patients with inflammation and chronic pain.
Take a look at this chart….
What you’ll see here is a weekly chart of Cara Therapeutics.
As you can see in the chart above, there are two horizontal lines. The green line is our breakout line and the red line is our target or exit line – where we take our profits.
However, you’ll notice two more things… When CARA approached right at $24.00 a share, it failed and then moved lower. Then for a second time, CARA hit the $24.00 mark per share to only move right back down.
When a stock hits resistance, $24.00 in this example, twice then the third time it has a high probability of breaking out.
And when a stock “breaks out”, here’s what happens…
While a stock is trading at resistance, short sellers or investors who sell stocks can either go to their broker and ask to borrow shares to short or just sell. Here, they’re exiting their trades and driving prices lower at a quick rate.
Take another look at the chart above…
Look at how intense the red candles are. The stock drops drastically and when the shorts are wrong, they have to buy back their stocks at any price or they’ll experience margin, where their broker forces them to buy their stocks back. When this occurs, it drives the prices higher.
Now, let’s look at that on a daily chart.
As the stock took out $24.00 a share, take a look at the volume that’s coming in. It went from trading at 578,000 shares a day to 1.6 million!
Share volume has nearly tripled in value in a matter of days and will continue to explode, along with price, in a short matter of time.
And when a stock has more overhead resistance, it usually continues to trend upwards. By that time, the media will start to pick up on it, it’ll receive some analyst coverage, and then you might even hear about it on a financial news channel.
However, for you… that easy money was already made.
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