Breakout Traders

[anima]

Hey everyone, this is my first post. This is a great site. I wish I had found it sooner.

Quote from onelot:

I wanted to start this thread to ask what types of techniques you guys are using to pickup on failed breakouts before they happen.
...

I am not a believer in breakouts myself. Whatever method is used, failed breakouts inherently involve large losses. You have bought high and are selling low. And over the past couple years, the majority of breakouts failed. Whatever happened to buying the dips?

Maybe some people do well with breakouts, and thats great. But I have tried and never did well myself. Buying the dips is much easier, IMO.

Jack
http://www.pupisup.com

 

[onelot]

Quote from anima:

Hey everyone, this is my first post. This is a great site. I wish I had found it sooner.



Whatever method is used, failed breakouts inherently involve large losses.

Jack

Only if you let your losses become large

 

[wally_]

Quote from anima:

I am not a believer in breakouts myself. Whatever method is used, failed breakouts inherently involve large losses.
Jack
http://www.pupisup.com

You have not tested all of them yet (that's impossible, anyway) so how can you jump to this conclusion. IMO, they work. It is important however to make sure that your losses are limited, in some of my ES systems I assume the 1.5 reward risk ratio with the 6 pt stop-loss. Here is the recent results for the last 5 month period: 70.75, 71, -63.5, 75, 73 [ES pts].

The system is simple enough to handle by a one-armed trained monkey.

 

[OldTrader]

I don't have your answer....but I thought I'd throw a few comments out for you to think about.

Neither you, nor anyone else, defines the word "breakout". I point this out to you because a so-called "breakout" on a one minute chart is entirely different than the breakout of a multi-month level. But clearly, the two types of breakouts are completely different, and probably should be handled differently. And perhaps if you go back to look at breakouts with some of their inherent differences in mind, it will clear up some of the confusion.

I see for example alot of the intraday types of charts take on the look of a breakout when we near the high or low of the day before. Now, to my way of thinking, that's not a breakout at all. So if someone is playing this like a breakout they're apt to be frustrated. Think about it: how far do you suppose the price is supposed to go solely because it breaks above the high of the day.

To further complicate, let's suppose for example that the future trades above the high of the day before, and the overall trend is down. I think it may be safe to say that the odds become huge that this particular breakout will not end up being successful.

That said, when I say "not end up being successful", I don't mean it can't move a point or two or three in your favor. Of course it can. And so, not only did you not define "breakout", you didn't define what would be successful in terms of a breakout either.

Many of the traders here use one minute charts. Now here's what we can say about one minute charts: first, when an upmove starts it will first show it's hand on a one minute chart. Second, the one minute chart will show EVERY failed and unsuccessful start of a move in either direction. So in other words, if you use it consistently it will ultimately get you into an important move....but while you're searching for that move, it will also get you into every false move that comes down the pike.

I think you can see that it's fairly important to think about the terms that you're using. Take today for example, Friday, 11/29. From the opening, to about noon eastern, we formed what appears to be a bottom type formation on the one minute chart. You look and decide, but I think we broke out on that formation just before noon eastern. Obviously, it didn't take long for that pattern to fail. And if you think about it, that bottom that we're talking about is just the price action leading up to a move above the intraday high of the day, and the high of the prior trading day, Wednesday.

My view is that the intraday charts lead you into traps...they lead you into the buy high, sell low syndrome, by creating the impression that there is a "breakout", when it really is nothing more than an extension of the highs or lows of the daily price range.

One final point: whether something is a "breakout" is a different subject than the "strategy" for trading this so-called breakout. For instance, if you bought the breakout, based on the completion of some type of pattern, it should be easy enough for you to tell when it failed...and therefore keep your loss small. In fact, if you know when it failed, then you should be able to trade it the other way. But again, alot of what happens depends on your time frame, and what you're expecting out of any particular move.

OldTrader

 

[onelot]

Quote from OldTrader:

Neither you, nor anyone else, defines the word "breakout". I point this out to you because a so-called "breakout" on a one minute chart is entirely different than the breakout of a multi-month level.

You're absolutely right. So, for the purpose of the discussion, and because I trade small intraday time frames as well, let's use the one minute chart as point of reference. Your example is exactly what I would consider a breakout as well... the type of pattern that forms a series of tops or reaches certain price levels and then backs off before continuing through those prices. The more well defined the price and the greater number of times the bounce occurs the more significant the opportunity.

Quote from OldTrader:

when I say "not end up being successful", I don't mean it can't move a point or two or three in your favor. Of course it can. And so, not only did you not define "breakout", you didn't define what would be successful in terms of a breakout either.

Very true. Let's define success, since we're talking small time frames, as 3 or more ES points with failures not reaching those levels and reversing.

Quote from OldTrader:

One final point: whether something is a "breakout" is a different subject than the "strategy" for trading this so-called breakout. For instance, if you bought the breakout, based on the completion of some type of pattern, it should be easy enough for you to tell when it failed...and therefore keep your loss small.

Ok this is what I'm trying to work on. The ease of telling when it failed, specifically. Basically, right now my stops are telling me when the breakout fails, they are small and are usually right, which is good. However what I'm looking for are some even earlier indications. For instance, 75% of the time I know my stop will get hit just by the way price is reacting, but, as of now, I have no way of defining that feeling, quantifying it... so I'm looking for signals/indicators which could help define it more.

Wow, thank you very much for helping me get very clear. I know though that I have probably made this a bit too specific... but don't let that stop anyone from generalizing.

Thanks again. Also, the remark about the high of day break when in a larger time period downtrend was great hint. It's usually the obvious stuff that is most useful.

onelot

 

[NihabaAshi]

Quote from onelot:

I wanted to start this thread to ask what types of techniques you guys are using to pickup on failed breakouts before they happen.

I'm aware of some... like using stochastic divergences or, well divergences in general and obviously price action, but nothing that seems to be generally consistent.

I trade the ES, hence onelot , so if you want to relate it to the minis please go right ahead.

Thanks and happy turkey day.

I trade both the ES and NQ. There are some very consistent methods of trading breakouts.

In fact...some traders here at ET have posted specifics of such strategies.

You'll just have to spend some more time searching ET for such posts.

However...something I notice you said....Stochastic Divergence...

When I trade breakouts or breakdowns I see two types...one that occurs via a parabolic move and another that occurs out of a tight-trading range.

Each requires the appropriate type of indicator for looking or waiting for divergence.

For example...Stochastic is general a consolidation (tight-trading range) indicator.

MACD is general a trend indicator.

Thus, if the breakout or breakdown I'm looking at is via a parabolic price move...I'm going to be using the MACD to look for divergence...if I'm looking for divergence.

Just the same...if the breakout or breakdown is out of a tight-trading range...I'm going to be using the Stochastic to look for divergence...if I'm looking for divergence.

I see too many traders using the Stochastic Divergence to trade parabolic price moves and they often get burnt.

How often have you seen the Stochastic in extreme overbought territory...showing some divergence with price...to only see the Eminis continue upwards for another several points?...

lots...at least I have seen such.

Vice versa when price is in a downward parabolic move and traders using Stochastic to look for a Bullish Divergence...

will often produce losses.

Using the appropriate indicator works very well for me and may not work for someone else...

yet...it's something they may merit a closer look at for you.

P.S. As a few others have hinted towards...the term breakout may be somewhat ambiguous.

Therefore, something you may see as a breakout...may be consolidation to me or vice versa.

NihabaAshi

 

[onelot]

NihabaAshi,

Great post.

The consistency I refered to was directed specifically at indicators that were unable to confirm or "indicate" the probability of a breakout failing, especially stochastics. I wasn't refering to the consistency of a breakout strategy. I know there's money there.

Not using stochastic divergence for parabolic moves is very helpful. The inconsitency I attributed to stochastics was mainly during these types of moves. I'll have to dome studies with MACD to see if I can see anything.

OK, now this satement kind of jumps out at me:

"if I'm looking for divergence"

so you force me to ask... when are you looking for divergence, and why wouldn't you. You don't have to tell me, but you definitely led me on

Thanks for your reponse. Very nice.

onelot

 

[NihabaAshi]

Quote from onelot:

...OK, now this satement kind of jumps out at me:

"if I'm looking for divergence"

so you force me to ask... when are you looking for divergence, and why wouldn't you. You don't have to tell me, but you definitely led me on...

Hi onelot,

What I mean by that statement is that if I know there's a key economic report due at a specific time...

I don't bother to look for trade setups near/at that specific time...

Thus...for example...if there's a Bearish MACD Divergence or Bearish Stochastic Divergence at 10am est...the same time something like the Chicago PMI is to be release...I will most likely ignore the trade setup.

Then...if the price breaks down after the numbers are released...most likely it had to do with the Key Report numbers instead of the technical pattern.

I like to trade after the initial knee jerk reaction to the numbers.

NihabaAshi

 

[prox]

The ES is notorious for false breakouts. Here are some things I look for:

Volume on the breakout and the following retracement. If it retraces below the breakout price, I would question the validity of the breakout immediately.

The current trend - say if we were in an uptrend for the past 5 hrs, any downside breakout would be unlikely to succeed. A valid uptrend will not breakdown (usually) unless:

- An initial uptrend line is broken and then attempts to retest the highs

- The MA (I use EMA 50 on a 3 min) has flattened out and some attempt of the MA break occurs.

- There is extra fuel to drive the trend downward. Say, a new high made on weak divergence , or a failed breakout up , that forces the longs to sell.

- Should be during non-lunch hour periods, as almost all breakouts are false at this time.

- Confirmation with a similar pattern, divergence, etc. on the NQ. i.e. - strength on the NQ will likely prop up the ES, regardless of how weak the ES seems. At the very least, check the TRINs (.90+) , up/down ratios to confirm there is weakness to fuel a breakdown.

 

[onelot]

thanks prox, that's good stuff.

what i'm seeing is that most of you use multiple signals to alert you to the success of a breakout/down... i suppose the trick is being able to know how much importance to attribute to any one signal and then make an overall assessment.

personally, i have dificulties trying to make a decision off of several different variables (in addition to the indicators i already use)... more times than not you get conflicting readings, but i suppose the answer lies in "experience." being able to assimilate it all and extract something meaningful.