subject: Breakout Trading Vs Rally Trading- Knowing The Difference! [print this page] Are you a rally trader? have you ever thought of breakout trading when the downtrend reverses itself and becomes an uptrend or the other way around when the uptrend reverses and converts into a downtrend. Rally trading has limited profit potential. Breakout if identified at the right time can be highly profitable. The big question is, can you do it?
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.
Some rallies are immediate candidates of a downtrend reversal. These rallies get traded in the expectation of a new uptrend developing. If you can get the entry right is such rallies, you can make substantial profit.
Rally trading is part of the breakout trading. Some indicators that are used to identify the nature of a rally is the price and volume searches, identification with the resistance levels and their strengths. Confirmation with volume behavior. There are some rally search formulas too that experienced traders use.
Breakout rallies at the end of a downtrend are found with price and volume searches, confirmed break of the down trendlines, confirmed volume behavior on failure and re-test. A 10 day and 30 day moving average combination is also used to identify the trend change. Chart reversal patterns like the ascending triangles, descending triangles, rectangle, flags, wedges and parallelograms.
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!
by: Ahmad Hassam
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