subject: Breakout Trading Vs Rally Trading [print this page] Author: Ahmad Hassam Author: Ahmad Hassam
Breakout trading depends on buying a stock just as it finishes a downtrend and before it starts a new uptrend. Every rally in a downtrend has the potential of turning into a breakout that signals the start of a new uptrend.So, identifying a rally from a breakout is real hard. Understanding this difference is important as a breakout signals the start or beginning of a new trend that might last for sometime.So what is a rally? A rally is a short term increase in the price. In a downtrend, a rally is a desperate attempt to revive the stock and is soon overwhelmed by selling. What causes this rally? A rally appears when traders get fired by a news or rumor that pushes the prices higher.Many inexpericed traders often mistake a rally with a breakout. It is true that breakout rallies are difficult to identify by even experienced traders. Now, many traders just trade rallies. These rally traders are not frustrated trend traders, they are content with the limited profit potential of a rally and trade in accordance.Some traders read about rallies in the financial sections of the newpapers or hear about them on CNBC or Bloomberg and try to trade rallies. These traders are least effective in trading rallies. In actual reality, rally trading is short term trading having fixed price targets.Now there are rallies that become immediate candidates of a downtrend reversal. Many traders mistakenly trade these rallies in the expectation of a new uptrend developing as a result of the rally. If your entry is right in such rallies, you can still make a substantial profit.How do you identify a rally? Some of the indicators that are used in identifying a rally is the identification of the resistance levels and their strengths, price and volume searches, confirmation with volume behavior. Experienced traders also use some rally search formulas.How do you find breakout rallies? You can use a 10 day and 30 day moving average combination to identify the trend change. Chart patterns like rectangles, parallelograms, ascending and descending triangles,wedges and flags are also used in the identification of a breakout rally. You can also sue volume and price searches, volume behavior on failure and re-test, and confirmed break of the down trendlines.As said earlier, breakout trading is highly profitable and if you can identify a true breakout, you can make a lot of profit. Breakout traders are always looking for new breakouts. But, the problem is how to identify a rally or as some call false breakout from a true breakout. Using the chart patterns can be one of the most effective methods to confirm whether a breakout is about to take place or not! About the Author:
Mr. Ahmad Hassam has done Masters from Harvard. Learn Candlestick Charting and know this 10 minutes a day Swing Trading Strategy that works for stocks, forex and futures!
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