Have you ever considered trading breakout stocks to give your portfolio an extra edge?
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 set up 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 breakout becomes.
In this article, I want to show you the key to trading breakout stocks like Cara Therapeutics (Nasdaq: CARA).
Cara Therapeutics is a top-performing medical cannabis stock that has been public since 2015. It focuses on providing treatment to patients with inflammation and chronic pain.
Lately, cannabis stocks have been on a tear as President-elect Joe Biden and Vice President-elect Kamala Harris support the decriminalization of marijuana, federal medicinal legalization and allowing other states to set their own laws on the matter… with New Jersey, Arizona, South Dakota and Montana legalizing majijuana during the 2020 election.
CARA is worth its weight in gold.
Take a look at this weekly chart of Cara Therapeutics to get a betting idea on trading breakout stocks…
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, I want you to pay attention to what happened the first two times CARA approached the breakout line… Early in the chart, you can see CARA approaching the breakout line but then failing and moving back down to its support level. After trading sideways for a bit, CARA makes another run at the breakout line… only to fail and move back down again to support.
This is a classic technical pattern that you’ll often see when trading breakout stocks. This magical level CARA can’t seem to break through is called “resistance.” When a stock starts bouncing between resistance and support, it has a high probability of either breaking out… or breaking down.
Here’s what happens as CARA breaks out…
As the stock moves up, traders who bought shares start to see a nice profit. When CARA hits a new high around $24, many of these traders decide to lock in their gains and sell their shares. At the same time, short sellers (who make profits selling stocks first and then buying them back at lower prices) see a stock that has climbed very high very fast, and start to enter short trades in CARA. They’re expecting the stock to move lower after hitting resistance.
Look at how intense the red candles are. The stock drops drastically as long traders sell their shares to take their profits and short traders sell shares to open their trades. This dual selling force drives prices lower at a quick rate.
Soon after, CARA’s price bounces off of support and starts to head back up. As its price gets higher, panicked short sellers are forced to buy back their shares to avoid taking major losses. All of this buying keeps pushing the stock higher and higher. This time, the stock breaks through resistance.
Now, let’s look at that on a daily chart to put some more things together for trading breakout stocks.
As the stock finally cruised through the breakout line at $24, we also see a major pop in volume. It went from trading at 578,000 shares a day to 1.6 million! It pays to dabble in trading breakout stocks.
CARA’s 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 upward. 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.
Have you had luck trading CARA recently or trading breakout stocks? What do you think about the stock and its performance in 2020? Let me know in the comments below!