Breakout From Consolidation

H

hoodooman

I daytrade stocks and swingtrade rydex funds but lately I've been looking at a strategy to buy stocks breaking out from consolidation. Gary B. Smith has been raving about this strategy for a long time, so I figure it must be worth a try.

I am using a free service that I learned about on ET that will find these stocks for me(cisiova.com). I use the horizontal breakout scan.

I have installed well over a thousand stocks into this scan and haven't reach any limit so far. Right now I think the program will analyze virtually any number of stocks that you can throw at it. There are other scans included in the program but right now I strongly suspect that the horizontal breakout scan is the best.

My stock picks are simply stocks ranging in price from 1 dollar to 100 dollar per share and trading at least 100,000 shares. There are other free sites where you can find these stock lists but cnbc screener is my favorite.

After loading all these stocks into a scan, I asked cisiova.com to pick out the horizontal breakout trades for the last 30 days and the results showed for well over 100 picks that 66% were winners.

Now can anyone tell me if they are using a similar strategy and what parameters that I might add which would improve this ratio of winners to losers?

regards and thanks for any replies.
 
There are many things which you can do to improve the breakout strategy. Here are some filters to try.
1 Relative strength.
2 Industry group relative strength
3 capitalization
4 Length of consolidation.
5 Volume change or OBV break.
6 Fractals based strategy like TBBLBG of Mark Boucher
7 High EPS ranking
8 Perhaps the most important is if you can synchronize it with overall market direction. So you need a way to find when market is trending and when it is range bound.
 
Quote from hoodooman:

Eastguru
Thanks for the reply. Can you supply some numbers to go with your ideas.
More...

A well designed breakout strategy will have many subtle tweaking to improve probability. It is also a function of your trading time frames. So values need to be looked at from that perspective.
To give you an example I use one industry group relative strength screen which takes the top 20% relative strength group over 5and 3 years. This gives 10 sectors currently.
1Specilaity eateries
2 Silver
3 Drug Related Products
4 Residential construction
5 Auto Parts Stores
6 Auto Dealership
7 Office Supplies
8 Gold
9 Sporting Stores
10 Non metallic mineral mining
Now if you take breakout of stocks in this sector with shorter term relative strength of 80 and up, you have a very high probability that every breakout to new high will work till the sector breaks down. Plus you get very few signals.
You can tweak the relative strength further by taking a weighted average of relative strength by giving higher weight to shorter time frames.
Or using lower capitalization stocks or only taking the second breakout. Or using EPS ranking.
There are many ways to tweak this further by using filters like OBV break on linear regression line or only taking breakout beyond 20 day or more of congestion.
 
thanks again for the reply. It will take me a while to digest all of your comments but I will say that since I started this thread, I performed a scan of only stocks which were rated an 8 or above out of a possible 10 points. These stocks have the highest probability of beating the market in 2004 (so cnbc claimed). The success of break outs for this group was slightly less but in the same ball park. The success rate for these was 60%. Obviously more work is required.
 
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