What’s the Hardest Part of Trading Breakout Stocks?
I LOVE trading breakout stocks. There’s just something so rewarding about catching a BIG winner… and riding the uptrend for weeks or even months on end.
It feels awesome.
But you know what?
Even though trading breakout stocks is relatively simple… well… it’s not exactly easy!
Let me explain.
You see… trading breakout stocks is… uncomfortable! Plain and simple. And in this blog post I’m going to tell you EXACTLY why trading breakout stocks can be so emotionally challenging.
I’ll give you some trusty tips, tools and resources you can use to help overcome this common drawback of buying breakout stocks.
By the time you’re done reading, you’ll be able to apply these lessons and ideas to your own breakout stock trading, for the better. Sound good?
Great. Then let’s get started exploring the biggest mistakes traders make when hunting for breakout stocks… AND… how you can avoid these common traps to come out the other side profitably.
So let’s get going!
Trading Breakout Stocks: Where Most Traders Go Wrong
The thing about trading breakout stocks is that… well… it’s not easy!
Do you know why? Let me give you a hint.
Here’s a stock I recently bought:
When I bought RACE after it broke out to $58, I was scared it was going to reverse lower. Seriously!
Without the benefit of hindsight, I thought I would be wrong and look stupid. I was sure that it could stop me out.
I had a clear cut entry signal and yet it was very tough for me to follow through.
It’s because as humans, we just seem to have trouble buying stocks that have already gone UP in price.
We have this burning desire to “buy low and sell high”.
But unfortunately… buying stocks that are already relatively high in price… is EXACTLY what buying breakout stock picks demands!
It turns out…
If you want to buy breakout stocks then you often need to do the uncomfortable, and put your money on the line after a stock has already made a significant move.
This isn’t always easy.
There’s lots of room to feel dumb. Because sometimes, the stock reverses lower and you end up having bought at the worst possible time.
And that’s a surefire way to feel stupid!
But on the other hand… and more often than you probably think… buying breakout stocks can just be the starting point of a major move higher.
See what I mean:
As you can see… when I bought ILG in the graph above… it had already made a pretty big move. And ponying up to pusht the buy button was difficult for me.
But I wanted to make money, and I had faith in my system. So I took the entry signal and it’s worked out better than I could have hoped.
But for some reason…
It seems a lot of traders don’t actually want to make money on a risk-adjusted basis… instead… they just want to be right!
… They want to feel smart.
… They want to be able to say, “I told you so!”
But you know what?
That’s not a good way to be profitable in the stock market.
And hey, I don’t know about you… BUT… I’m here to make money!
“This is about cold hard cash!”
This isn’t an intellectual hobby, or a way to test my intellect.
Nope. These trend following trading ideas are about finding big winners that can significantly add to your bottom line.
“This is how I’m growing my wealth and improving my life!”
Whether you are saving for retirement, speculating to grow your capital or just trying to preserve your wealth, sticking to your investment and trading plans is key to long-term success.
And that’s why…
If you want to trade breakout stocks successfully… you simply MUST learn how to swallow your discomfort… and buy stocks that are hitting new highs!
Because you might not know it… but… stocks that are hitting new highs can keep hitting new highs for YEARS on end.
Are you ready to hop on the train?
I know putting your hard-earned money at risk in stocks that already appear over-extended isn’t easy.
It can make your stomach do backflips.
Hell, I still sometimes have trouble sticking to my system and pulling the trigger when the methodology says buy.
… “So what’s a trader to do?”
Fear not. We’ll get to that.
But for now…
The important part is to be aware.
Reflect on the fact that buying breakout stocks can be challenging.
Admit you’re going to be late to the party… and show up anyways!
The fact of the matter is, trading breakout stocks requires you to buy tickers that feel extended. It can be uncomfortable.
Deep down…. you might feel your heart speeding up… as you hover your mouse over the buy button in your brokerage account.
But that’s just one of the things you need to do if you’re going to trade breakout stock picks successfully.
… And how do I know this?
Well… to be honest… there have been countless times in my own stock trading career where I’ve had trouble pulling the trigger, even though my breakout stock trading system had generated an entry signal.
I’m not perfect.
There’s always room for improvement!
And maybe this has even happened to you…
You have an objective entry signal… but… “things just don’t feel right.”
So you take a pass.
Only to watch your potential stock pick push higher and higher in price, leaving you on the outside looking in.
It stings, doesn’t it?
It’s easier said than done. So…
It can help to practice getting started with only a fraction of your capital, in order to gain some confidence and built trust in your own abilities not to deviate from your intentions in the heat of the moment.
And to make matters worse… as if your own internal worrying wasn’t enough…
There will always be people telling you you’re too late, you’ve missed the move, or that you’re buying stocks after they’ve already become overbought.
But you can also catch lightning in a bottle. You can find BIG winners that soar higher, higher and higher in price, while skeptical onlookers wait for a dip that never comes.
Does that sound familiar?
The truth is…
Buying breakout stocks can be immensely profitable. But you need to manage risk carefully, stick to the system, and keep taking swings at the ball… even… when you think you’ve already missed the move.
Some of my most successful trades have been in stocks that have already moved 20, 30 or even 40 percent higher.
And I know it sounds crazy… but… there’s a reason for this!
Why Buying Stocks After They Breakout Makes Sense:
The reason buying breakout stocks makes sense… even AFTER they breakout… is because… they can keep breaking out!
I truly believe breakouts are processes and not events.
If a stock is going to go up in price by 100% or 200%… well… it needs to go up by 20% first. Then there are bound to be more 10, 20 and 30% breakouts along the way higher.
It makes sense when you think about it, right? So…
“That’s why you don’t need to be afraid buying a stock that’s already gone up!”
I should admit that I primarily trade from weekly charts. So there’s often a bit of a pullback in the short term.
But that’s a minor bump in the road compared to the MUCH larger trades I’m usually targeting.
And here’s the other crazy thing about these sustained breakouts:
Because most of the major market indexes are market-cap weighed, most of the stocks in an index don’t contribute to the growth! Here’s a recent example from CNBC, that shows often only a few stocks contribute most of the gains to the market.
So… the implication is…
There are a small number of stocks that are responsible for the VAST majority of the index gains.
That also means those stocks have gone up quite a bit more than the average.
Now… let me ask you…
“Don’t you want to own those stocks?!”
You see, buying breakout stocks in uptrends can be REALLY rewarding. It can be low-stress, low-time-commitment and you can get consistent results while still feeling confident.
Sounds pretty good, doesn’t it?
Well… this kind of result CAN be yours. You just need to step out of your own way!
Because at the end of the day… if you’re reading this blog post… you probably want to know how to overcome this common breakout trading mistake of passing on your signal, and improve your own bottom-line results along the way, right?
At least, that’s what I’d want to read if I were you. So… in the final section of this article… let me show you some of the tips, tools and strategies I use to help improve my breakout stock trading and avoid this key mistake. Sound good?
How to Trade Breakout Stocks Consistently Without Making Mistakes:
As I said at the beginning of this blog post: Trading breakout stock is simple, but not easy.
There are some basic rules you can follow, in terms of a strategy for trading breakout stocks. But as long as you’re in a bull market, trend following breakout stock picks can work very well.
Unfortunately, it’s still not perfect (no trading system is). You just simply won’t be right 100% of the time.
In fact… you’re more likely to be right… only about 40-60% of the time.
And that means you CAN have some big losing streaks.
At least every now and then.
So for most stock traders, the challenging part is sticking to the trading system.
Even when you have 3, 5 or even 10 losses in a row, you need to step up and take the next trading signal!
But this often isn’t easy.
You’re psychologically battered, you’re discouraged from the immediate losses you’ve just experience, and you think to yourself, “what’s the point of taking another loss?”
Yet… just when you quit… is often when you would have gotten the BIG winning trade that could make your month… or even your year!
So how can you stick to the system? Well, despite the frustrations the market can throw at you, there are some basic exercises and tools you can employ to help make this easier.
Let me show you what I mean.
Tips and Tactics to Help You Buy Breakout Stocks More Profitably:
Over the years, I’ve become much better at trading breakout stocks. And in this section, I’m going to tell you some of the key breakthroughs I had that really changed things for the better.
There’s a lot to get through, so let’s cut to the chase!
First of all…
No one stock position should put you at the risk of ruin: One of the biggest mistakes I see from new and inexperienced traders is that they bet too big. Instead, you need to understand that trading systems work out over a series of trades and the outcome of any one trade shouldn’t put you at the risk of ruin.
In fact, you should be ready to take 10 or 20 losses in a row. Because chances are, if you trade long enough, this will happen.
Simply said, by betting small you can ensure you’ll be in the game for a long time. And this increases your odds of learning to trade breakout stocks successfully.
On the other hand, if you blow through all your capital in a few months, you’re much less likely to really learn what it takes to have a lifetime of stock market success… (and that’s what you’re really after, isn’t it?)
Learn to take losses: The key to avoiding the risk of ruin, is keeping losses small. The best way to do this is with practice. If you’re not comfortable using stop-losses and technical exit signals, well, you’re going to have a hard time trading successfully over the long term. No trading system is right 100% of the time, so you need to learn how to deal with the inevitable losing trades, don’t you?
In that case, practice makes perfect. Start experimenting with taking stop losses, even if you’re only selling a few shares at a time. Think about your approach to the markets and develop a plan for when to sell your stocks.
I truly believe that in the stock market, you need to learn to lose before you can learn to win. This is a key step on the path to successfully trading breakouts and it’s a common area of error for new breakout stock traders.
Understand your stock market methodology: The reason I don’t use blackbox trading systems is because the creators don’t share the underlying stock selection algorithm. Without knowing how a trading system works, I have trouble applying the system consistently. I’m likely to get discouraged and jump ship at the first sign of a losing streak.
On the other hand, the reason I like trend following breakout stocks so much is because it intuitively makes sense to me. So I can stick to the system, even when things get a little bit choppy.
I know that I’m playing for BIG wins, and I’m likely to get stopped out early sometimes, especially in sideways markets. I also know that one or two big winners can pay for as many as 20 other trades.
And if you miss that big trade, it can really hurt your bottom line. So you need to stick with your system through thick and thin. Because when you do catch those breakout stock picks, they’re bound to pay for themselves, and more!
Be aware of the bigger market picture: Trading breakout stock picks worst best in bull markets. Sometimes when you have the winds of momentum at your back, it feels like you can do know wrong as you profit from one breakout stock pick after another.
But it’s not always that easy. In sideways markets for example, buying breakout stocks can be incredibly frustrating. And the small losses and commission costs start to add up into death by a thousand paper cuts. It’s not easy.
To make matters worse, if you’re a long-only investor, you also won’t likely profit from buying breakouts in brutal bear markets. At the end of the day, that kind of widespread panic can crush most breakout stocks across the board.
But the good news is, if you can recognize this environment using an approach like top-down-trading, you can adjust your expectations accordingly to preserve your mental and monetary capital.
Does that make sense? I hope these tips can help you. I know it’s not anything mind blowing. But simple habits applied regularly can make a big impact.
Now to be clear… at the end of the day… you still need to put in the work!
You might believe you can make a lot of money trend following. But if you can’t stick to the system, well, you’re not going to reap the eventual profits.
So, while I hope this article was a good start for you in your journey to overcome the mental challenges of buying breakout stocks, it’s going to require ongoing work. If you really want to thrive long-term, you need to be perpetually practice, prepare and take action.
And hey, if you’re still feeling confused after reading all this, then don’t worry! That’s because I made you a video to help! Check it out…
Video: The Hardest Part About Buying Breakout Stock Picks:
The good news is, you can develop key trading habits to help you. And the resources below will help inform you on this path. So keep reading for more information on how you can trade breakout stock picks more successfully.
Resources to Help You Avoid Breakout Stock Trading Mistakes:
Now, as promised, here’s some further reading to help you trade breakout stocks more effectively. It’s a mix of tactical technical lessons and trading psychology ideas that can help you master the emotional side of thing:
- 7 Trading Psychology Lessons I learned from Dr. Brett Steenbarger
- When Should Trend Following Traders Sell Their Stocks?
- Common Trend Following Mistakes to Avoid
- Breakout Strategy for Stocks via Simple Stock Trading
- 5 Tips for Buying the Best Breakout Stocks (without too many failed breakouts) via Morpheus Trading
- How Jesse Livermore Traded Breakouts via Trader Moe
- Trend Following Song
Finally, if you’re STILL hungry for information on trading breakout stocks more effectively, just check out the free offer below to keep learning!