Day And Swing Traders

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Stochastic Breakout

Stochastic Breakout Explained

A breakout is a trading setup that occurs at a crucial resistance level when the

price breaks and gains support above a resistance. It is a bullish breakout. A bearish

breakout also known as breakdown occurs as the price breaks below an initial key

support level that turns into resistance.

The takeaway here is a key resistance level turns into a support when a convincing

bullish breakout occurs, but a support changes into a resistance during a compelling

bearish breakout (breakdown).

This article clarifies both bullish and bearish stochastic breakouts.

 

Bullish Stochastic Breakout

A bullish stochastic breakout takes place when the following occur:

1/ the stochastic indicator is overbought

above seventy-five level,

2/ the overbought stochastic trade setup

occurs in the vicinity of a significant resistance level,

3/ the price breaks above and pulls away from the major resistance level,

4/ and the price pulls back to retest the key resistance level that changes into

support.

View the chart below

 

Image = "a daily chart is showing a bullish stochastic breakoout"

From 22 October 2014 to 14 November 2014, the stochastic indicator (8, 3, 3)

was overbought above seventy-five level.  However, on the 30 October 2014,

Visa Inc stock (V) gapped up from the 53.67 price level.  On that day, the stock

closed at 59.16.  A valid bullish stochastic breakout was in place since that date,

and the stock rose to the 63.11 price level within seven days.  Indeed, day and

swing traders that were selling because the stochastic momentum oscillator was

overbought was forced to close their bearish trades.  That also provided more "fuel" for

the bullish price action.  On the other hand, smart day and swing traders who mastered

the bullish stochastic breakout took a substiantial profit at the end of the day.

Explaining The Bullish Stochastic Breakout

The stochastic oscillator breakout occurs when it is overbought. Therefore,

traders that always sell because the indicator is overbought have to close their

bearish trades as soon as possible as the price begins to rise above the resistance

level. Indeed, to close a bearish trade, one has to buy back. Naturally, those traders

provide the "fuel" for the dynamic bullish price action. On the other hand, the smart

traders who know how to trade the stochastic accumulate more profit throughout

the subsequent volatility.

 

Warning:

"the stochastic bullish breakout is a trading setup. The next step is to validate

it before applying multiple times frame trading method.

The stochastic bullish breakout is not a trading signal but a trade setup"

In general, there is a surge in trading volume when the price is retesting the major

level.

 

Note that sometimes, the price may gain support above the key resistance level then

rises to the first nearest key resistance level before falling back below the resistance

level. Undoubtedly, that is a typical breakout failure. In addition, traders who avail

themselves of a top-down trading method will be able to contain the risk and manage

the trade without too much strain.

 

Warning:

"It is indispensable that traders use a free demo trading account to practice until the master how to

trade the bullish stochastic breakout like a professional trader"

Stochastic Bearish Breakout

The stochastic bearish breakout occurs as the following occur:

1/ the stochastic oscillator is oversold below

the twenty-five level,

2/ the oversold stochastic trade setup

occurs in the vicinity of a strategic support level,

3/ the price dips below the support and continues to decline for a while,

4/ then the price rallies up to the crucial support level that turns into resistance.

View the chart below

Image = "a weekly chart is illustrating a bearish stochastic breakout"

From 27 February 2015 to 10 July 2015, the weekly stochastic indicator

(8, 3, 3) was below the twenty-five level (oversold).  Though, many bullish stochastic

traders were still buying Wal-Mart-Stores (WMT) stock, the price broke below

the significant support at 82.61 (orange line on the chart) that quickly turned

into a robust resistance level. That was a typical bearish stochastic breakout.

Notice that both in August and October 2015, the bearish momentum

became very strong and the stock fell at a faster rate due to the stochastic

bearish breakout.  Consequently, those that were misusing the technical

oscillator were forced to sell their initial bullish positions.  Moreover,

that also provided more "fuel" for the bearish price-action.

Explaining The Bearish Stochastic Breakout

The bearish stochastic oscillator breakout occurs when the indicator is oversold at a

time when the asset is overbought.  Evidently, an overbought asset leads to a distribution.

Subsequently, traders that always buy because the stochastic indicator is oversold have

to close their bullish trades as soon as possible as the price begins to turn down at a quicker

rate below the critical support level. Indeed, to close a bullish trade, one has to sell. As a

result, those desperate bullish traders provide the "feed" for the new bearish price action.

On the other hand, the sharp traders who are familiar with how to trade the stochastic amass

more profit as the volatility surges.

Warning:

"Stochastic bearish breakout is not a trading signal but a trading setup. Therefore, it is

necessary that one validates bearish breakout trading setup before applying multiple times

frame trading method"  {Author = George Beaulieu = Founder of stochastic-macd.com}

Very often, there is also a gush in the trading volume when the price retests the key support level.

 

Infrequently, a bearish breakout will be unsuccessful as the price swiftly turns around on or near

the first and nearest support below the initial main support level. That is a bearish breakout trap

or failure. Once again, day or swing traders who bring into play multiple times frame trading

method can subdue the risk and handle the trade without fear.

Attention please

When a stochastic bearish breakout occurs, the bearish breakout traders are trapped or

squeezed to the point where their stop-losses are taken out. This provides a bullish momentum

fuel that propels the price in the opposite direction. The contrary is also true when a bullish

breakout failure is in place.

Essential Step To Avoid Stochastic Breakout Failures

1/ always confirm the breakout trade setups on a higher time frame,

2/ employ a top down trading strategy,

3/ never make use of a single period,

4/ never apply the technical analysis alone,

5/ always combine the technical trading with the fundamentals. At least perform

Google finance acid test plus check the economic news,

6/ exploit the trading triangle,

7/ secure first profit or take profit gradually at the first and nearest key level,

8/ always make use of stop loss and do not assume anything,

9/ close the trade if the signal fails and do not continue to move the stop loss,

10/ remember that the failure of a bearish breakout is a bullish trade setup and

vice versa,

11/ do not fight the market. Once the failure is confirmed, one may quickly reverse

the opening strategy and take the other side.

12/ Always be aware of other market participants. Try to go into their minds plus

do not be overconfident.  {Author = George Beaulieu = Founder of stochastic-macd.com}

Cut losses, admit errors and move on.

Surely, there will be another stochastic breakout-trading setup round the corner.

Conclusion

The stochastic indicator is very popular momentum technical oscillator, but it is also

the most misused technical indicator. As one becomes an expert stochastic trader,

one will make a profit from the stochastic breakout trading setups. Those setups

are very remunerative. To become an expert stochastic indicator breakout trader,

one must adopt a multi-talented trading mindset by combining the technical and

fundamental analysis but also the top down trading and stochastic strategies.

Finally, advanced day and swing traders who master the Elliott Wave principle and

138.2% Fibonacci extensions will trade the stochastic breakout trade setups more accurately.

 

 

 

 

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