The positive performance across global stock markets has been incentivizing both retail and institutional traders to join. During the first half of 2021 record inflows into stocks had been pushing valuations to new records. Considering the S&P500 has just hit a seventh straight record high, traders must know several methods they can use to take advantage of such market rallies.
Trading breakouts is one of the best ways to take advantage of market rallies. Traders need to identify resistance levels on the chart and wait until the price will break them. Several key important requirements must be met. First, the market must already be in an established upward trend. Second, the resistance level should be an area on the chart where there had been rejections in the past.
Ultimately, the buyers need to enter the market aggressively and break above resistance in force. The breakout candle needs to be a large one, closing near the highs. That is suggesting there is little profit-taking and also, new market participants are joining on the upside after the breakout.
However, not all breakouts will be followed by a straight continuation on the upside. In fact, the price will very often retest a broken resistance area, before continuing on the upside. That means trading impulsive vs. corrective structures is an approach traders need to consider. Studying a beginner’s guide to trading is required, in order to understand several technical analysis terms.
One of the main traps in such cases is that traders will rejoin the trend after the pullback and end up seeing it was actually a false breakout. To prevent that from happening, a proper analysis of the price action context will be required. If the bullish trend had been in place for a long time, a strong corrective period might follow. Also, the pullback towards the broken resistance should be mild and not impulsive.
Pullback to moving averages
Similar to trading corrective moves towards broker resistance levels, pullbacks towards moving averages will occur very often in a bull trend. Regardless of the bullish strengths, the price won’t be moving up in a straight line. Moving averages such as the 20 EMA, 10 SMA, or 50 SMA, are generally used by professional traders, especially on smaller time frames, to spot better entry locations for their bullish trades.
Moving averages are considered dynamic support/resistance levels and because of that can provide a move flexible approach for spotting areas of interest on the charts. It is not yet certain when the next stock market pullback will occur. If it does, traders have plenty of tools at their disposal to take advantage of them.
Same as trading any other setups, risk management plays a critical role. Traders must learn to place stop loss and take profits around areas that will imply their market assumptions are wrong or right. Not all trades will end up as winners and thus, the ratio between risk and reward should be low enough, so losing periods will be exceeded by winning ones.