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What To Do During A Low-Volume Breakout

When Things Don’t Align, This One Signal Will Help You Make The Right Entry

 

Most stock trading methods lay out for you a number of fundamental and technical factors that should be in place before taking a trade but often the stars are not always aligned in the stock market. While you certainly want to see as many key factors in your favor, it can be confusing as to what to do when certain factors don’t materialize. For example, during a breakout, you want to see at volume spike higher as the stock breaks through its buy point but what do you do if that doesn’t happen?

Exceptions To The Rule

When a stock sets up to breakout, you want to see the stock form a base over the last 8 weeks or so followed by price trading up through the top of the base pattern. The logic being that the higher the volume, the larger the conviction of the traders taking a position in the stock, particularly the large institutional traders who have billions under their control that show up during these critical periods.

As a general rule, you want volume to spike 40% to 50% of its 50-day average volume level. If that doesn’t happen, you are generally advised to step aside and move on to the next trade or until all of the key factors line up for you.

But, if volume doesn’t show up during the breakout, that doesn’t meant that its automatically game-over. Sometimes, price action itself will show that a an entry is valid, often followed heavy volume in the coming trading days.

Price Laps

A price lap is when on a given trading day you see price open outside of the previous trading day. This is often confused with a price gap which is when price opens outside the previous open but still trades within the previous trading day’s price range.

A price lap reveals a change in the underlying dynamics for a given security where it’s price value is now in question. For the bulls, the demand for the stock has spiked which is resulting in a new valuation for the stock. For the bears, the demand has cratered and, overnight, the stock’s value has fallen dramatically.

That said, the rest of Wall Street hasn’t caught on or is hesitating to see what happens. This hesitation is why you see heavy volume in the following days, not the current one.

 

Actionable Signal

You always want to have more positives than negatives lined up before taking a trade but if a number of the key steps are in place and a price lap occurs without the desired volume level, it is still an actionable signal.

As long as you follow the same caution and risk control guidelines of your method, the entry signal can get you in a trade just before it snowballs in the desired direction.

General Risk Control Guidelines

A good rule of thumb for any stock trading entry is to place your stop 7% away from your entry point combined with risking no more than 2% over your overall capital.

As Paul Tudor Jones, hedge fund manager and profiled in the book “Market Wizards”, says, “At the end of the day, the most important thing is how good you are at risk control.”