A momentum breakout or breakdown occurs when a stock is moving up or down quickly with volume. This is often the result of a catalyst or because the stock is moving through a key area of resistance (such as a moving average, price line or trendline). As more traders are piling in to take advantage of the strong move, the stock is propelled. A momentum breakout or breakdown is sure to slow down, pullback or reverse at some point, so don't get caught buying at the end of the move and plan your share size accordingly to manage risk. Momentum moves happen right out of the open or in-session. Momentum breakouts and breakdowns can still occur without a catalyst, but in order to be validated and low-risk the stock needs to be crossing a key level of resistance or a moving average.
What to look for:
Increasing volume in the direction of the move and/or lower volume on the candles opposing the move
Above average relative volume
Timeframe(s): All timeframes
When to enter:
If you are late to the move, wait for a pullback. Enter as the stock pulls back to a level of support or as the stock is making a new high (for a breakout) or a new low (for a breakdown) after the pullback.
If you catch a catalyst early and the move is just starting, enter with small size and scale up after a low volume pullback or confirmation of the move.
Momentum moves can be very quick or they can run for several minutes. As a general rule, the smaller the timeframe that the move sets up in, the less duration of the move. For example, if you are watching a breakout of an intraday pivot resistance level, don't expect the move to run for 30 minutes. A lower risk strategy is to take 1/4 or 1/2 profit at 2%, move your stop to break-even and then scale out as the move progresses (adjusting your stop along the way).
There are a few different options for stops. You will need to find out which works best for your situation.
Just below the nearest level of established support (for a breakout) or just above the nearest level of established resistance (for a breakdown).This method requires that you are mindful of your position size on entry so that you can afford to get stopped out and still be within your risk tolerance.
If you are expecting at least a 2% move for your first profit target, place your stop at 1% away from your entry.
Half the amount between your entry and your profit target (if you have a level of resistance up ahead that you think the price can reach). For example, if you enter at $10.00 and you believe the stock can run to $12.00, your stop would be at $9.00.
Note: If you are trading small caps in which there is a lot of volatility, I would stop out as soon as the move goes against you or takes too long to form. For small cap momentum breakouts, you will have to practice scalping and quick exits to find your edge.
5-minute VWAP breakout