How Professionals Select Stocks for Breakout Trades?

 How Professionals Select Stocks for Breakout Trades?

 

Are you a breakout trader? Or Reversal trader?

 

What is the best way to select stocks for breakout trading?

 

Stock Selection plays an important role in trading, if you couldn’t select the appropriate stocks for your trading set up which will lead you to losses. There are many ways to select stocks for trading but before that, you must be clear about whether you are a breakout trader or reversal trader. (Reversal trader in the sense taking trades only based on reversal patterns) if you are belonging to the first category (breakout trading) these are the major stock selection methods that you can follow.

 

1.   Narrow CPR Stocks

2    NR7 & NR9 Stocks

3    Bollinger Band Squeeze 

 

Why Narrow CPR Stocks?

 

The Stock market moves in cycles with periods of contraction followed by periods of expansion, Contraction is the basic element of Narrow CPR Stocks. In the Previous 20days, the stocks which are in contraction will be the Narrow CPR Stocks for the upcoming day. This contraction period may lead to an expansion the next day. This is the logic behind selecting the Narrow CPR stocks for Breakout Trading.

 

Calculating the 3 different pivot points (TC- Top Central Pivot Point, Central Pivot  point, BC- Bottom Central Pivot Point) within the CPR is as follows,

1.    Pivot point- (High + Low + Close)/ 3.

2.    Bottom central pivot point (BC)- (High + Low)/ 2.

3.    Top central pivot point- (Pivot – BC) + Pivot.

 

CPR width is defined as the % difference between Top Central and Bottom central with reference to Central Pivot. If the CPR width is less than 65% of the average of the last 20 days CPR width, it is defined as narrow CPR.

If CPR width is narrow (that is the distance between TC and BC lines of CPR is very low) then it indicates a trending market, which we can expect breakout from important price levels.

 

Why NR7 & NR9 Stocks?

As I said above Market goes through regular contraction and expansion cycles. If the stock is in contraction compared to the last 7 days those stocks are known as NR7 stocks. This contraction phase is the cool off time before the storm. If we get NR7 stocks for trading we can expect a wild move on that stock the next day.

NR9 stocks are similar to the NR7 stocks, Stocks which are in the contraction phase for the last 9 days are known as NR9 stocks. NR9 is more powerful than NR7 stocks but it's very difficult to get NR9 stocks every day. If you are a breakout trader you can try this stock selection method. Whether you are an Opening Range Breakout trader or Price action pattern trader you will get wild moves in these stocks after the breakout.

 

Bollinger Band Squeeze

This is one of the commonly using breakout trading stock selection methods. If the Bollinger band is squeezed in the daily time frame chart you can expect an expansion on upcoming days on that particular stock or index. This kind of stock selection method gives you more accuracy in trading. You can avoid false breakout in an extent through this type of stock selection method.