Good vs Bad Breakouts

Thanks for the clarifications. I'm especially interested in the RS. It might well be one of my (many :mad: ) missing pieces.

Best regards.
 
Hi!
Excuse me for my "not fluent" english. :)

About breakouts, I would like to talk about an interesting trading tactic for short term traders: "Expansion breakout" by Jeff Cooper.

According to Cooper, the best breakouts occurs when you have even a noticeble "daily range expansion".

3 rules for the "Buy":

1- today has to be the maximum of the last 2 months
2- today's range (high-low) has to be widest range of the last 9 days.
3- tomorrow set a "buy stop" some ticks above the maximum of today (ex. 0.25pt futSP)
4- set the risk (stop loss) some ticks below the close of the day of the breakout (ex. 1 pt futSP)
 

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Be forewarned, placing a stop beneath a wide range bar can do severe damage to your nervous system if youre not accustomed to that sort of thing.
 
Quote from easyrider:

Be forewarned, placing a stop beneath a wide range bar can do severe damage to your nervous system if youre not accustomed to that sort of thing.
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The stop is not beneath the low of the wide range bar, but some ticks below the close of the wide range candle. ;)
 
Very good post here. Seems I never do it just right, but I make a profit most of the time. If the beakout does not have at least 1.5 times average volume, forget it. Maybe look at the first pullback if it keeps going. Also if a breakout is taken, and price comes back to previous support, below the breakout point, why am I still in this trade. Many ways, to trade a breakout. Keep this going.
Keith
 
Quote from nononsense:


PS: Perhaps peterfigliozzi might agree that this is 'prediction' even in his vocabulary.
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Maybe that guy predicted a breakout, I don't know. But...

predict: foretell on the basis of observation, experience, or scientific reason.

It's a subtle point, but when I take a position I have no idea what is going to happen next. I am not fortelling anything except I will make money in the long run, because I make more money when it goes my way than I lose when it doesn't. I am not predicting what will happen next. Sometimes I make the mistake of predicting and lose money because of it. This is also known as not trading the plan.

When I play poker and call a bet with a 4-flush. I have no idea what the next card will be. I am certainly not predicting what it will be. But when I call that bet I know I will win more when it hits than lose when it doesn't. If that's not the case, I won't call the bet.
 
I was thinking about if there was any difference between "predicting, and getting out if your prediction does not come true" and the probability framework that I use. Operationally, no, although it might help some who have problems accepting losses to think about it in terms of probabilities. However, with research, I think it makes a big difference. I have seen a lot of people (including myself) waste time trying to find something that can be used to make a reliable prediction, which is very difficult, if it is even possible at all. On the other hand, it is comparably easy to find situations where the probabilities are skewed one way or the other.

Breakouts, for example... how many are going to look for ways to predict a breakout ahead of time?
 
Quote from stocon:

FWIW I was looking over some of Tom Demarks work and he said if the close prior to the BO was down relative to the previous close there was a better chance the break was good. Large range days with an up close were more prone to failure. I don't know if any of it is true just read it in a book. I always wait for the retest of the new support, this allows a smaller stop. Now if someone knows this is wrong because they have done alot of testing then I'd love to hear about it. Third time through for price and some clear air till next resistance are other considerations. The final thing I look for is a spring or some feint at the lower end of the range of congestion.
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i attended the Tom demark presentation about his demark indicator at this bloomberg thing in 2003.
he made that call s&p bottom out @ 865 or something. that was call within 1 point of error.
 
Quote from Salzburg:

Confirmation tips

Prices often return to a support or resistance level following a price breakout. Novice traders can get caught in the undertow of trader's remorse if caution is not taken. A seasoned trader may have noticed a lack of volume increase and decided to take his profits and run. While the new trader, not paying attention to volume levels, gets caught in the selling fury and suffers significant losses.

Breaking the levels of support or resistance can be triggered by a variety of factors that are above or below traders' expectations. Changes in earnings, management and competition can all contribute to a breakout. An informed trader needs to be familiar with and monitor the possible causes of a break in support or resistance levels.

"As with any trading method, there will be some false signals," says Rose Wang Chin, principal at New York-based Carat Capital LLC. "Also, breakouts may get you into a trade once the trend has been underway for a while. You may miss a portion of the move or get in just in time for a reversal."

Beware of those dangerous moves, echoes Mark Leibovit, chief market strategist at Sedona, Ariz.-based VRTrader.com. "False breakouts can create whipsaws. A key is determining ahead of time, as best as practicable, where you are in the move. A breakout near the top of a move, for example, especially accompanied by good news, might be a bull trap."

A good way to affirm your expectations following a breakout is to examine the volume associated with the price breakout. If prices break through support or resistance levels with a large increase in volume and the trader's remorse period is on relatively low volume, it implies that the new levels will remain.

Conversely, if the breakout is on moderate volume and the remorse period is on increased volume, it suggests traders are not confident with the new price levels and a return to previous levels occurs. Using filters, increasing the time frame before making the trade and using other forms of technical analysis may help to alleviate getting caught in a false breakout or being affected by trader's remorse.

"I usually buy in two stages," says Lawrence G. McMillan, president of Morristown, N.J.-based McMillan Analysis Corp. "I buy a half position when the futures trade at prices above resistance and complete the position by buying the other half if prices close above the breakout level that day. In this way, if it's a false breakout, you've only taken half a position."

Wang Chin suggests an idea used by professional traders: "Historically, breakout systems have been one of the better risk-adjusted technical trading systems. They result in the trader following the underlying trend, while avoiding some false movements in the markets."



Making the trade

There are several different ways to trade breakouts. Monitoring patterns within consolidations; tops and bottoms; highs and lows; moving averages; daily, weekly or monthly prices are just a few ways to look for breakouts. But, solely relying on one method can be harmful to a trader's financial health. As is the case with other forms of technical analysis, a variety of data needs to be collected and analyzed to make an informed trade.

"When trading breakouts, I don't use any particular system other than to note where prices have met resistance at least two times previously," McMillan says. "Then, any subsequent move above those resistance levels is an upside breakout. The more resistance that has built up preceding the breakout, the better I will like the breakout when it eventually occurs.

"On the other hand, if you don't notice the breakout until after it's already occurred, presumably the day after you spot the breakout on a chart, then I wouldn't chase it. I would attempt to buy it on a pullback to levels just above the breakout level."

The methods traders use for monitoring breakouts are a lot like snowflakes - no two are alike. Finding a method that you feel comfortable with and that actually works is a challenge for some traders. Because of the particular dynamics involved in trading breakouts, many traders have developed idiosyncratic signals or techniques that will alert them when a breakout occurs.

"I don't like buying or selling to enter a new trade based simply on when the market makes a new 10-day high, for example," Kaeppel says. "I prefer to buy or sell breakouts based on some multiple of the 10-day standard deviation of daily price movement or some multiple of the 10-day average daily range. Using these methods, the trigger points adjust automatically to current market conditions."

Breakouts provide traders with a place to set stops. For example, a short seller could set a buy stop above the market. This would limit the losses on short positions established under the assumption that selling pressure would limit price advances.

"I use trailing stops once the profits begin to accumulate. After the breakout, if the contracts move nicely higher, then I will begin using the 20-day simple moving average as a mental closing stop. This method automatically forces the trailing stop higher as prices continue to rise. Also, it's never a bad idea to take some partial profits along the way, to reduce your overall risk and to lock in some profits," McMillan says.

Although the methods may vary, the goal remains the same. To spot and profitably trade new breakouts is the desired objective for any trader. However, keeping your eyes on the prize can be difficult in the fast-paced and constantly changing world of breakouts.

Trading breakouts is not a walk in the park. Spotting breakouts before they occur is a difficult task. There are necessary precautions that need to be taken to stave off debilitating losses. A trader needs to have some type of stop-loss provision in place before trading breakouts. Because many breakouts fail, establishing a stop-loss provision can help cut your losses in the midst of a collapsing breakout.

"I would stop myself out if prices closed back below the breakout level," says McMillan. "That means it was a failed breakout."

Another disadvantage to using breakouts is slippage costs. The difference between the estimated and actual prices you pay and receive on your trades could be large with breakouts. "If you are doing large size it may be difficult to get filled at your stop price if you are buying into a strong new up trend or selling into a strong downtrend," Kaeppel says.

When trading breakouts, you nearly always start the trade with profits. The possibility of a lucrative payoff is what attracts some to trading breakouts. However, the momentum required to create the breakout may be fleeting and losses may ensue. Novice traders are not aware of the possible dangers that lurk around the corner. Whether the momentum carries through and creates profits is an uncertainty traders must be aware of when using breakouts.

Deciphering the difference between a real breakout and a false breakout is crucial for making successful trades. There are many factors that contribute to breakouts. Traders must be prepared and have done the homework to trade breakouts before they actually show up on charts.

Discipline is an important quality for any trader, but especially for one who trades breakouts. A trader needs to be patient and wait for the breakout to develop. Often times there are many false signals that may lead an unprepared trader in the wrong direction. Trading breakouts requires paying attention to the many factors that make up a breakout. Volume and the extent of the price movement must be considered carefully to determine that a breakout really has occurred. This is where the discipline is needed. When traders see price levels breaking resistance or support levels they must wait to see if it truly is a breakout.

"A lot of breakouts fail," Kaeppel says. "It takes a great deal of discipline to keep entering orders to buy on the next upside breakout when the last three upside breakouts failed and resulted in losses."
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RE;good breakouts & price persistancy

Trader-reader Saltzburg;

Another way to increase hit rate probabilities[not prediction] is to focus on a few, 7 or less , even if your quote list is much larger.

GE has been in sideways trend most all of the year;
high probability I will miss much or all of FIRST real- multi day/week swing traders breakout.

Also volume is clearly secondary;
GE has had all kinds of volume, still in sideways trend.







:cool:
 
The best breakouts will occur after a period of sufficient basing. This is different on any given timeframe, but think of it like building a deck off your kitchen on the second floor. You can only build it so far out before it falls on itself and is not safe. At the same time it's not much use if its too small either. On a daily chart I like to see them last a few weeks. Also I find that the best breakouts occur on a large gap which continues to follow through. Additionally look at the chart for additional signs of strength leading up to the base. Thurts, laps, gaps and whatnot. This shows a strong stock that just went into that resting period and is likely to be strong again. Hope this helps.

Brandon
 
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