The breakout and run day trading strategy is a fusion of swing trading and day trading. If you are a swing trader, already scanning for high momentum stocks, this day trading method could be used on some of the high momentum stocks you will likely be seeing on your scanner results.
With the breakout and run strategy trades typically last several hours, as opposed to minutes with the Day Trade Trend Strategy. A breakout and run trade can even become an overnight trade if desired, if the stock keeps running.
What is the Breakout and Run Day Trading Strategy?
The basis of the strategy is that we only trade stocks that have high momentum on the daily chart, it then consolidates (tighter the better), and then breaks out. We trade it the day after a strong and confirmed breakout.
The stock candidates we want to trade had a strong breakout meaning the daily candle closes near its high and volume increased on the breakout day. Once we have a breakout on the daily chart in the prior session, we can look for a day trade (the next day) based on the method described in the sections below.
- The stock is one of the strongest in the market. This is easy to find by sorting stocks by performance. Finviz can do this. Look for strong short-term performance, like over the last month, or three months. You can also use your swing trade scans to look for trade candidates.
- The stock has a well-defined consolidation top (if waiting for an upside breakout) so that you can clearly see the breakout. That said, as long as there is a clear breakout (since we are trading after that breakout), even if the consolidated is a bit jagged looking, that should still be okay.
- The price broke out of the consolidation in the prior trading session, and it finished near the highs of the day on larger than average volume.
- Volume doesn’t need to increase drastically, but it must not decrease. It must be above average/more than most recent days (not including any massive recent volume spikes).
- IT MUST close near the high of the day.
- There is enough volume to enter and exit within the day, with ease. For US stocks, this should be at least 1 million shares a day. For Canadian stocks, look for volume of at least 100,000. While this is still low, upping the Canadian volume requirement will result in very few trades.
- The price action contracts leading into the consolidation, squeezing the price.
- There is a strong trending movement leading into the contraction. The may price will often contract, but doesn’t always have to. A sharp price move followed by a tight consolidation may be tradable on its own (no contraction); this would be a flag or pennant formation.
- Volume drops off during the consolidation.
The Breakout and Run Day Trading Strategy
I will describe the criteria for a long trade. A short trade is the same, just everything is flipped upside down.
Day Trading Strategy Setup:
The setup has already been discussed. We want a strong stock that recently had another strong push to the upside, and then fomed a tight consolidation. Ideally, that consolidation comes after a price contraction where the price has gotten squeezed—think a triangle pattern or price swings that converge toward each other. It can also be a flag or pennant pattern (no contraction, just a move up, consolidation, and then a breakout higher), but with these make sure the consolidation is very tight and has very low volume.
Low volume on the consolidation shows the stock has been forgotten about by retail traders. That is good. The institutions haven’t forgotten. They are buying up what they can. When the volume dries up, that is typically when they start buying at higher prices.
We then wait for a breakout of the consolidation and wait for a daily close before acting on the day trade. If the first breakout bar is a bit questionable—such as a lack of volume or the price doesn’t close near the high of the breakout day—then the next session may also be used to confirm the breakout (not traded). Remember, we are not trading until the day after we have a strong confirmed breakout.
This is different than with a swing trade. With a swing trade I am typically placing my entry order just above the consolidation…and not waiting for a daily close.
Once we have a confirmed daily close breakout, then we look for a day trade entry the following day.
Some potential candidates for this strategy are posted on the Best Day Trading Stocks page each week. These stocks have consolidated. They need to break out in the proper way (daily close breakout, close near high, preferably higher volume) and then provide a day trading setup in order to be valid.
There many stocks consolidating at any given time. The ones on the Best Day Trading Stocks page are just a small sample.
Day Trading Strategy Entry:
The stock below shows an example of the type of daily breakout we are looking for.
The stock has been in uptrend, the price contracted (waves get smaller on the pullback) at recent highs and has formed a consolidation. The price has a volume increase, a clear breakout, and closes near the high of the day.
This means we look at trading the stock the following day.
Charts from TradingView.
For the entry, we are doing to do nothing for the first 45 minutes of the following day (9:30 to 10:15 am EST).
If the stock drops after the open, we are going to wait for a turn higher on the 5-minute chart. This means we buy when the price moves above a recent swing high on the 5-minute chart. As new swing highs form, you can place a buy stop order $0.02 above, or you can wait for the price to move back above a recent swing high and then hit it will a market buy order.
(note: my intraday charts are Mountain time two hours ahead of EST. 7:30 AM is the market open, not 9:30, so trades can occur after 8:15 on my charts, which is 10:15 EST)
If the stock moves sideways or moves up after the open, the entry point is the same. Buy when the price moves above the most recent swing high (waiting at least 45 mins after the open).
I highly prefer to buy when the stock has initially moved a bit lower or moved sideways for the first 45 minutes. If the stock rallied strongly at the start of the day, quite often the move is already finished by the time you would enter. If the price moves up initially, I really want to see the price coil up and contract before I would consider buying it as it moves to new highs.
If the price trends lower and hasn’t provided a valid entry within two hours of the market open (11:30 am EST), I would leave it alone. We want eager buyers coming in. They aren’t that eager, or they are possibly weak if they haven’t made their move to buy the stock up by 11:30 am.
This is a very simple entry point. You can come up with your own rules for attaining a bit better price. For example, you may use an intraday consolidation breakout method, like the one discussed in How to Day Trade Stocks with a Trend Strategy.
Day Trading Strategy Initial Stop Loss
Place an initial stop loss a few cents below the most recent swing low once you have your entry signal. Sometimes this will be daily low, so far, but not always. This is where the stop loss starts. We are going to move it, but at the outset of our trade this is our risk. We can then base our position size on this stop loss amount.
I have found the stop loss should ideally be about 2% or less (the difference between the entry point and stop loss, compared to the stock price). Once you start getting a stop loss of more than 2% it is going to be harder to be compensated for that risk.
Ideally, we want our profits to be bigger than our losses, so with a 2% stop loss, we want our profit to potentially be 4%, 6%, or more. Those types of moves do happen intraday, but if we start needing a move bigger than that to compensate for a large risk trade, the odds are going to start going against us.
Aggressive Trailing Stop Loss Exit
We placed our initial stop loss, but as the price moves in our favor we are going to move that stop loss to reduce risk and eventually lock in profit.
The first type of trailing stop loss exit is what I call an aggressive one-bar trailing stop loss. The initial stop loss is placed based on the rules above. Once the first hourly candle is complete following our entry, the stop loss moves $0.02 below the low of the most recently completed hourly candle.
As new candle lows form, the stop loss is moved up, assuming the candle low is higher than the prior candle low. If a candle makes a lower low, the trade is stopped out.
With this type of stop loss the trade nearly always ends within the day. When any type of potential reversal is starting to occur, the trailing stop loss gets us out.
If you want, add a bit bigger buffer below the hourly candles, but keep it to about 0.25% of the stock price or less. This buffer will sometimes save you from getting stopped out of big movers.
In the GSX example above, a buffer would have kept you in the trade for longer…and for a much bigger profit. The downside, you give up a bit of profit (the buffer amount) when the price does reverse.
Moving Average Trailing Stop Loss Exit
This method can often result in trades that last more than a day. Although, you still always have the option to close the trade at the end of the day. Or, if this method has produced a big profit, switch to the aggressive method above so that the trade is likely exited before the end of the day.
For this method, you are also going to use the hourly chart and a 9-period exponential moving average (EMA). Exit as soon as the price drops below the 9-period hourly moving average. Don’t wait for an hourly close, get out when the price drops below the EMA.
With this method, that first purchase on GSX, just above $98, would still be ongoing, with the price now above $131…pretty good for a trade that started as a day trade with less than 2% risk! This trade was evetnually stopped out at $124. The trade took four days and locked in $26 per share.
This is an exceptional example, as stocks don’t often run-up 30% in a few days. Most of the trades are going to smaller profits, like 1%, 2%, 3%, 5%. But even a few big wins like this a year could really amp up results….but it requires scanning to find those really solid momentum names with great trade setups.
There is nothing magical about a 9-period EMA. Experiment with other settings or indicators to see if something works better for you.
Reward:Risk Exit Method
Another option is to simply exit at a fixed percentage profit or fixed reward:risk. If risking 1% on the trade, consider exiting at a 5% profit. The initial stop loss doesn’t move. Or if risking 2%, exit at a 3:1 reward:risk, taking a 6% profit.
I would only hold overnight if the price is onside at least 2%. This will give you a bit of a buffer between the current price and your stop loss in case there is a gap overnight. In a fast-moving stock, 5% isn’t that much, so you could potentially move in and out of these trades multiple times per week.
Look at how much the stock typically moves in a day (or over a few days) to get an idea of what kind of profit target is reasonable. This option is good if you can’t watch charts all day or adjust your stop loss constantly (like with the other two exit methods).
This method takes less work and you are assured of a nice reward:risk. The downside is that you will never get a huge profit, UNLESS the price gaps through your exit order giving you a bigger profit than expected.
Re-Entry Into the Same Stock
You may re-enter the same stock the following day—using the same entry, stop loss, and trailing stop loss method—only if the stock closed near its high and had a strong upward price move in the most recent trading session. You want to see that stock moving up with strong conviction in the price moves.
Once the stock has a down day, or fails to move higher aggressively, the stock needs to form a NEW valid trade setup before it can be traded again.
If you are scanning for swing trades (or checking the top-performing stocks every few days) you should be able to find at least a few of these trades each week. Again, this is a fusion between day trading and swing trading. We may not have trades every day.
If there is no valid trade or re-entry, don’t trade. Wait for the valid setups.
One Additional Rule for This Day Trading Strategy
If you opt to hold a trade overnight, check the earnings calendar. NEVER hold a short-term trade like this through an earnings announcement, EVER.
Even if you have a nice profit and think the earnings will push the stock further in your favor, don’t do it. One bad gap against you could erase all your profits from loads of small winning trades.
Other Day Trade Examples
Carmax was a swing trade and could have been used for this strategy as well. A clean breakout from a consolidation occurred on August 10. This followed a contraction in volatility in an uptrending stock. We then look for trades on August 11 on the 5-minute chart.
Here’s the entry and initial stop loss.
Here are the trailing stop loss methods. This trade is more typical in that the risk was $0.43 per share and the reward ended up being $0.74 (1.7:1 reward:risk) with the aggressive stop loss.
The first EMA touch got the trade out flat. This happened very quickly and just brushed the EMA, so unless you had a sell order sitting there you likely survived. That said, these sorts of things will happen and will sometimes stop you out of a good trade.
The next EMA exit came just below 105.52, an approximate $2 profit per share (4.6:1 reward:risk).
Final Word on the Breakout and Run Day Trading Strategy
There are a number of variations with this swing day trading method. To find out which method you like best find at least 10 stocks that have recently broken out and presented these trade setups. Compare the result using the different exit methods, and also consider whether you are willing to hold overnight. Also, consider whether you can watch the chart during the day to adjust your stop loss. If you can’t, the reward:risk/fixed target method may work best for you.
If you like the moving average, but don’t want to hold overnight, maybe you shorten the average a bit, or use it up to the close but then close the trade at the end of the day.
This is a blueprint, where you take it is up to you. Have fun with it, make it your own, and share you experience and insights in the comments.
Cory Mitchell, CMT
Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.