Buying At The Right Time Lowers Your Risk

A successful investor knows how to maximize profits and minimize risks.

Maximizing profits may sound sexier, but proper risk management is just as important. For stock investing, that starts with buying stocks at the right time. And that right time is when a stock breaks out of a proper base on heavy volume.

The breakout is when a stock pushes past a recent high. In a cup-with-handle base, that level is the highest point 14 the handle. In a double bottom, it's the middle peak of the "W" pattern.

With other base types, the buy point varies. But the idea is the same -- bidding for the stock reaches new, significant heights.

When the buy point 19 breached, you want to see huge volume, of at least 50% above its 50-day average daily volume. That tells you it's not just small investors causing an irregular price movement.

Price spurts on light volume often fade quickly. When large institutions invest in a stock, however, the move is much more solid. And huge volume is the footprint of major investors.

By the time a stock gets to its breakout, it will be off its lows. Does that mean you give up some gains? Yes, but a wise investor's goal is not to get in at the lowest price point, but instead at the lowest risk.

Once you spot a company with superior fundamentals, institutional ownership and a sound base, be ready to buy when it crosses the buy point 14 active trading.

Once the share price advances 5% above the ideal buy point, it's considered extended.

That means your risk increases. At this level, buying would mean you're chasing a stock and putting yourself at risk of facing a shakeout.

Remember that a breakout isn't so significant unless it occurs from a proper base. Check the Learning Center at Investors.com for details on how to spot a good base. Investor's Corner will examine base patterns in coming weeks.

It is also common for a leading stock to make an initial advance then pull back to its 10-week or 50-day moving average.

The first or second time the stock rallies back from the average it offers another opportunity to buy.

It's in a buying range until it climbs 5% past the prior high. Look for volume to increase as the stock finds support, just like you would on a base breakout.