Day Trading Resistance Breakouts
Trading the short-term resistance breakouts is a common strategy with day traders. Quite often a stock consolidates for a couple of days before resuming its rally. Sometimes this consolidation occurs after a gap up. The stock is not always ready to rally and needs to pause first.
The daily candlestick chart is a convenient tool for locating potential setups to day trade. The daily candlestick chart for Brookdale Senior Living, Inc. NYSE:BKD is shown below with a multi-day resistance breakout trade.
Chart 1. Daily candle chart for BKD
The daily chart for BKD shows a stock that gapped up from the 50-day SMA (simple moving average) and paused for three days consolidating its gains. BKD formed a short-term resistance level at 29.00 and closed near its high for the setup day. The volume increased on the gap up day and declined during the consolidation days. The 50-day SMA has turned upwards and is showing a strong short-term uptrend.
Should BKD break through the short-term resistance level at 29.00 then an entry can be considered. A 5-minute intraday bar chart for BKD is shown below.
Chart 2. Intraday 5-min bar chart for BKD
The intraday chart for BKD shows three days prior to the trade entry day and the trade entry day. Displaying a couple of previous days on the 5 min chart reveals some additional information. From the 5 min multi-day chart, on the entry day the stock initially traded up to the short-term resistance level at 29.00 and pulled back. BKD finally breaks through and rallies hard before pulling back.
The day trader could take an entry from the bounce and would likely be filled at around 29.25.
The risk-reward for the trade should be considered.
The risk is determined by the initial stop which can be placed at 29.05 which is below the intraday pullback.
The reward can be determined by visually studying the daily chart and noting the general daily ranges for the larger range days. From the daily chart the ranges tend to be around one dollar which when added to the trade entry day's low gives a profit target of (28.72 + 1.00 = 29.72).
The risk-reward can now be determined
Likely entry price of 29.25 and an initial stop of 29.05 with a Profit Target of 29.72 gives:
Profit = 29.72 - 29.25 = 0.47
Risk = 29.25 - 29.05 = 0.20
Risk reward ratio = 0.47 / 0.20 = 2.4
With a risk-reward ratio of 2.4 this is a trade worth taking as a lot of trade setups have ratios of less than 2.0.
BKD just misses its profit target. Some day traders may prefer to use a trailing stop. Using a trailing stop placed below the intraday pullback lows would allow the day trader to ride the trend until the market close
Stock Analysis for Finance Students and Investors