7 proven strategies to identify potential breakout stocks and boost your investment portfolio

Anyone who deals in stock trades should keep an eye on market trends, and breakout stock traders are no exception. By keeping an eye on market trends, you can identify sectors that may experience growth in the near future. Pay attention to areas where demand is increasing, and where there is room for new players to enter the market.

3. Monitor volume and price

One way to identify potential breakout stocks is by looking for those with increasing volume and price momentum. Breakout stocks often have a sudden surge in trading volume, which may indicate growing investor interest. Additionally, keep an eye out for stocks that are breaking through key resistance levels or forming bullish chart patterns, such as cup-and-handle, ascending triangles or flag patterns.

4. Identify companies with strong fundamentals

To identify promising companies, look for those with strong fundamentals, like increasing revenue, growing profits and positive cash flow. Those indicators suggest that they are doing well financially, and these companies tend to be more likely to break out. You can find these numbers in quarterly reports or with a web search for "(Company name) earnings."

Even if a stock appears strong, remember that everything is relative. To evaluate a stock, it's important to compare it to its sector or peers and ensure it is strong compared with other alternatives. Breakout stocks typically outperform the market and their sector, indicating the potential for further growth. The relative strength index (RSI) is a commonly used technical indicator for gauging the strength of a stock relative to its peers.

6. Keep an eye out for catalysts

Catalysts are recent developments that could drive stock prices upward. These could include successful product launches, favorable regulatory decisions or mergers and acquisitions. Also keep an eye out for positive earnings surprises and upward revisions in earnings estimates. As you can see, anything that creates a positive outlook for the company's earnings can contribute to a breakout.

7. Exit at your target price

Once the stock reaches your target price, it is advisable to exit the position and take your profits. Typically, stocks that break out beyond their resistance levels often come back down shortly after. This is one reason why it's important not to drag your feet when it comes to exiting the position. When that time comes, be sure to move on and look for your next opportunity.

Bottom line

Although identifying breakout stocks is not an easy task, it can provide your portfolio with a significant advantage. Look for companies that appear strong by checking their fundamentals, comparing them to the market, and by seeking out companies with a competitive edge. These are just some of the ways you can profit from breakout stocks that are set to break past their resistance lines.

This story was produced by Bankrate and reviewed and distributed by Stacker Media.