Good vs Bad Breakouts

[Salzburg]

MURRAY and BRANDON

Thanks!!

I've been collecting info on breakouts in a .doc file for a while now and will add your comments. Very helpful.

For me, the "trouble" with breakouts is that I'm not sure where to place a stop. Understanding trades that involve short-term pullbacks or rallies is easier in that respect.

When price has more or less flatlined for a while -- the way Brandon likes to see it -- I suppose the logical place for a stop would be comfortably under the sideways action. That can sometimes be a little more than I would like to risk, but that's my own particular problem.

One trader I corresponded with uses the breakout itself to place his stop. But then he actually waits for a pullback afterwards -- he waits for a pullback to <u>roughly</u> 50% of the move and then tackles the trade from there.

Murray: could you say another few words about narrowing down the list? What you’re recommending is essentially to whittle down the candidates so I can take a really close look?

 

[ehsmama]

Quote from easyguru:

Market Direction. Early in bull phase there are many false breakouts but once a first leg correction happens, the breakouts are more reliable.

Most important is earning surprise lead breakouts. Typical they have very good success rate. There is lot of research on this and if you do backtesting you will find validity in same.

Industry relative strength. There is sweet spot in the relative strength score where lot of stocks breakout and then there is frenzied move for few months. The highest relative strength may not be the best indicator of that.

Thank you easyguru,
Your information regarding Earning surprise lead breakouts success rate has made a lot of difference to my P/L in past few months.
Thanks again for sharing that info,
Rajiv.

 

[vinceb]

good work

 

[easyguru]

Quote from ehsmama:

Thank you easyguru,
Your information regarding Earning surprise lead breakouts success rate has made a lot of difference to my P/L in past few months.
Thanks again for sharing that info,
Rajiv.

I am happy that you found success. If you want to find further success with earning surprise lead breakouts add the criteria of shares outstanding and you may find dramatic improvement in your results.

 

[illiquid]

Quote from PetaDollar:

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.

I agree the difference is operationally subtle: obviously, every time I put on a trade I am expecting there is a greater likelihood for prices to go my way than not; obviously, I am not always correct and would never expect things to work out that way. I try to force myself to be open to all eventual scenarios and never lock myself into one outcome that "needs" to come to pass.

But do I think probabilistically while I'm trading? I really don't believe so. It's a completely different feeling for me when I'm trading vs playing poker or blackjack. I do not think "with variables X, Y, and Z in play, I will always buy, because over the long run buying here will make money." I am never thinking about the long run; I am always looking at what the right thing is to do at this specific moment, and maybe that means X+Y+Z= sell.

For me, there is no equivalent in trading to cards coming out at random; everything I see takes on meaning, and there is no reason to abandon this attitude just because I've entered a trade for the sake of "letting go" psychologically to the outcome. After I open a trade, I am either right or wrong; either way, I learn something about what I should do next. Do I believe there are "perfect" entries and exits on any given trade, given a certain time frame, given one's powers of perception and overall "edge" in sizing up the situation? Relatively speaking, I would say yes, and my job is to find them. This is far different to me than just thinking I'll put up a bet and maybe I'll hit my flush, maybe not.

Just my .02