Picking breakout stocks is one of the most favored methods for those utilizing an active investing approach since this strategy promises superlative returns. This method involved zeroing in on those stocks whose prices are varying within a narrow band. If the price of the stock falls below this channel, it could be the best time to sell off this stock.

However, the best time to buy a stock as per this strategy is when it is about to break above this trading band. Such stocks offer the prospect of impressive gains.

Identifying Prospective Candidates

In order to identify breakout stocks, you must first determine their resistance and support levels. A resistance level is a barrier which must be broken so as to be identified as a breakout stock. Meanwhile, a support level is the floor for the stock’s movement.

At the breakout level, the demand for the stock has peaked, making it a natural choice for traders. On the other hand, when a stock hits the support floor, traders are eager to offload it. In order to spot breakout stocks, you would have to see which of these are on the brink of breaking the resistance barrier or those that have just breached this level.

Checking Whether It’s for Real

Stocks that have breached their resistance levels should ideally be in high demand among traders. But the test of whether this is a genuine breakout is when they go on to attain higher prices and the old barrier becomes a new support. This is why it is important to determine whether a long-term price trend is about to emerge.

Only a study of long-term trends can determine whether the existing trading channel has been breached effectively. This indicates the strength of the support or resistance levels. If you can identify the effective channel for a stock, picking it even at a not-so-reasonable price would give you significant returns.

Screening Parameters

• Percentage price change over four weeks between 10% and 20% (Stocks which are showing considerable price increases, but whose gains are not excessive.)