Here's a nice safe "break" trade.
Quite often when a stock breaks a support level, they will run back up and try to recover. If price cant push back up through the support level and fails, there is a very good chance it will be heading down to the next support level. In this case support was around $5.95, when it broke down, it came back up, touched $5.95 again, and failed to push back through signalling an entry when it started heading down the next day, We Short sold this one on 25th Feb @ $5.76 with a target of $5.00 in mind because $5.00 is the next support level from back in mid 2001. All going well this will result in a 13.2% (66% Inc Leverage) profit.
The reason we consider this to be a safe way of trading is because we can have a stop loss just above the support line that has been broken @ $5.95.Our stop loss will be set at $6.00.
Update 27th Feb: Well sometimes the unexpected can happen in the market, as witnessed on this trade today. The stock went into a trading halt this morning soon after open because they were about to release an announcement. When this happens there is nothing you can do but hope and pray that it is bad news if you are short, or good news if you are long, in this case we were short so obviously we were hoping for bad news. It was not forthcoming, the company announced that they had made better than expected profits for the half year and naturally the investors liked the news and placed buy orders in the market before they even came back open from the trading halt. So, when the market re-opened, the price had jumped up to $6.15 We wasted no time and took our stop loss right away before price got too far away. at this stage it appears we did the right thing as price did infact run higher. The most important thing is that we are out of the trade with a not too heavy loss and we have a clear head, not hanging on and hoping they pull back, it's always best to just cut your losses then look for the next trade. We will be watching this one very closely to see if it can sustain its run up, should it start retracing on high volume we will short sell it again :o)