Finding the Right Stocks
Finding the next explosive stock is not easy, but finding stocks with breakout potential or at least some profit potential are everywhere. There are many methods for finding stocks ready to move (or already on the move), which include chart patterns, candlestick patterns, trendline breaks or indicator levels.
Take a triangle chart pattern for example. As the price converges, giving the price action a triangle-like appearance, you can determine when the breakout will occur and thus set an alert so you are notified when it occurs or if it is close to occurring.
Setting an alert does not mean you need to trade but simply keeps you aware of possible trade candidates.
Alerts can also be adjusted, and may need to be, in order to provide a timely signal. If the alert is based on a trendline, the intersection point of that trendline changes continually as the lines slope. Therefore, if an alert is set to warn a trader of a potential trendline break, this alert will need to be adjusted as the days go by (or bars, if day trading) and the breakout price changes.
However, alerts need not only be used for getting into trades. They can also help you get out of trades. While using stops is recommended on trades, many traders use mental stops and exit trades manually when conditions turn against them.
SEE: Analyzing Chart Patterns: Introduction
The example below shows how alerts can be used to aid in the entry and exit of a position. Microsoft had been in a downtrend in 2011; an alert could have been set to signal when that downward trend had been broken. This is marked on the chart "Trade Alert to Buy."
The ensuing aggressive rally created another steeply sloping upward trendline. An alert could be set so that when the trendline is broken to the downside, an alert is received and an exit trade can be considered (marked as "Trade Alert to Sell" on Figure 1).
Figure 1. Microsoft Corp. (Nasdaq:MSFT) Daily Chart. Source: Thinkorswim
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