About how many points over a 2-day high (or general resistance area) is considered a safe "breakout"? I have noticed that a lot of times when the price hits a resistance area of a 2-day high (or 3-day high or whatever), it will just bounce back. It seems to be that chatroom monitors are always calling a "buy QCOM when it hits <certain price>", what do you guys usually set as a "it will be a breakout at this price, so buy"?
Trading breakouts/breakdowns
- Thread starter TheFinn
- Start date
Once a stock trades 1/4 point above resistance, I will enter immediately via ARCA on a market order. My stop loss will be 1/4 point below the resistance level.
So, if a stock has strong resistance at 50, I will buy as soon as I see a trade print at 50.25 or above. I will also look for increased volume to confirm that the break out is real. I use 5 minute charts.
The reverse holds true for breakdowns on support levels.
This method will usually limit your stop loss to about 1/2 point, plus or minus 1/4 point for slippage.
So, if a stock has strong resistance at 50, I will buy as soon as I see a trade print at 50.25 or above. I will also look for increased volume to confirm that the break out is real. I use 5 minute charts.
The reverse holds true for breakdowns on support levels.
This method will usually limit your stop loss to about 1/2 point, plus or minus 1/4 point for slippage.
Thanks for the reply mcgregor. I just made 1/2 a point off a slight breakout on EBAY using your ".25-over rule"- maybe it was just luck in my case, though.
Anyway, what are yours (and anyone else's) strategies for support/resistance on a new 2-day high? After it breaks through, what do you use as your new support and resistance levels? Should I go back to 10-day support/resistance levels or what?
The Finn
Anyway, what are yours (and anyone else's) strategies for support/resistance on a new 2-day high? After it breaks through, what do you use as your new support and resistance levels? Should I go back to 10-day support/resistance levels or what?
The Finn
THe only true way to play breakouts is to anticipate them and buy beforehand. You want to be selling to the morons who still think breakout strategies work and will buy the breakout. Only 1 in 5 breakouts are real. The rest just retrace back to congestion. I'd rather be there selling and scaling out. The odds favor me. If it doesn't breakout, I go in and break it out. I just need a tick over the resistance point for it to trigger other traders' alerts, and they go in to buy. If it's thin, 5k shares will do the trick just fine.
I guess it depends on what you call a "breakout", praet. If you consider going .50 above a resistance level, then bouncing back to the same level a breakout, then that is fine and you can make 1/2 point right there. Are you saying it's better to wait until the slight momentum over a resistance level slows and then short? That sounds like a sound strategy.
Just my two cents - but "breakouts" are classified as such because the price is presumably breaking out from an area of resistance (usually multiply tested). But support and resistance aren't the laser beam thin lines that many traders picture them to be. There's usually some degree of fuzziness or a support/resistance zone involved.
The same reason that makes that zone a possible breakout or breakdown is what also makes it a possible swing (reversal)point. As such, whenever you're playing such an area you should be prepared to either play in the direction of the breakout/breakdown if the momentum seems to be working in your favor or reverse if the momentum is dying at/near the support/resistance zone.
A lot of times you might be looking for resistnace at maybe 50 so you might anticipate a breakout at maybe 50 1/4. That's OK as a preliminary entry but since it's still likely that that resistance you're looking for could actually extend from maybe 49 3/4 to 50 1/4 (or even 50 1/2), your entry should be considered preliminary and you should have a fairly tight stop in case momentum exhausts very near to your "breakout" line.
You also should do as a few others have already noted, scale out incrementally and in so doing snug up your stop to reduce the risk of your remaining position. In that way, if the breakout does occur and it pops from 50 1/4 to 51 1/4 quickly but then runs out of gas, you'll have taken some profit out of the trade and your stop will get you out of the rest of your position so you can keep what profit you've already taken.
Finally, you've got to recognize that support and resistance areas can also act like magnets and the price will actually oscillate around it for a while. So you've got to have a method of either cutting off your entry attempts and/or expanding the DMZ around the support/resistance you're looking at.
I'm not big on scalping fractions, but with choppy markets I do often tend to take enough quick profit out of the trade so that I can move my stop to at least net breakeven in case there's no follow through.
The same reason that makes that zone a possible breakout or breakdown is what also makes it a possible swing (reversal)point. As such, whenever you're playing such an area you should be prepared to either play in the direction of the breakout/breakdown if the momentum seems to be working in your favor or reverse if the momentum is dying at/near the support/resistance zone.
A lot of times you might be looking for resistnace at maybe 50 so you might anticipate a breakout at maybe 50 1/4. That's OK as a preliminary entry but since it's still likely that that resistance you're looking for could actually extend from maybe 49 3/4 to 50 1/4 (or even 50 1/2), your entry should be considered preliminary and you should have a fairly tight stop in case momentum exhausts very near to your "breakout" line.
You also should do as a few others have already noted, scale out incrementally and in so doing snug up your stop to reduce the risk of your remaining position. In that way, if the breakout does occur and it pops from 50 1/4 to 51 1/4 quickly but then runs out of gas, you'll have taken some profit out of the trade and your stop will get you out of the rest of your position so you can keep what profit you've already taken.
Finally, you've got to recognize that support and resistance areas can also act like magnets and the price will actually oscillate around it for a while. So you've got to have a method of either cutting off your entry attempts and/or expanding the DMZ around the support/resistance you're looking at.
I'm not big on scalping fractions, but with choppy markets I do often tend to take enough quick profit out of the trade so that I can move my stop to at least net breakeven in case there's no follow through.
Since you used the 50 increment, I'll give you an example of the last breakout I played, cause It was at 50. Look at aol. You see that pennant at 50. On thurs, I thought it was gonna break over the pennant really early. I took 4k on island at 49.98. I waited. He tried to shake it by printing at the low of that 15 min bar. Then he had to fill the buy order. A few large prints occurred at 50, and he immediately offered 50.4 I sold all 4k at .38 for a 1600 profit. Then on monday, I thought that the consolidation under 50 looked "for real". I just liked the pennant basically. I bought 2k on the open at 50, and 3k more at 50.1. As the breakout succeeded, I began to scale out. 2k at .73 1k at .97. I sold my remaining k's at 51.47, and 51.97. NOte that the high was around 52 that day (just luck on my part though). If I had waited for a set number to buy the aol (say 50c) over 50. On the first day, I probably would never have entered. If I had, I would have lost money immediately. ON the second day, the real breakout, I would have made money buying there, but I was already scaling out and up 2k by the time you would have entered your buy order. The downside, is that im wrong sometimes and it never breaks out. But I keep very tight stops, and play the breakouts with the futs, and I can anticipate them well on the nyse. On the nas, if I have to, I'll break it out myself. Someone always offers up on island (stupid schwabbers) and i whack them.
It seems there are as many different styles of trading as there are traders. I consider myself a relatively new and inexperienced trader. I've been hanging out in a trading chat room for a number of months now with some guys that do a pretty good job of teaching things like trading breakouts and such.
The main trader does his research each night and builds a list of stocks to watch for the next day. Then he watches them all very carefully, for strength or weakness.
When a stock is strong and it hits his `buy trigger' he trades it. He places his buy triggers above resistance for confirmation. He expects a minimum of a point from his trades and usually gets more, so confirmation makes a lot of sense.
If a stock is weak and it drops below support through a short trigger he enters his short trades.
Scalping is not the intent so confirmation makes a lot of sense. Also, contrary to another style posted earlier of taking a trade in the opposite direction if support or resistance isn't breached -- the strength/weakness factor keeps that from being an option. A tradeoff for potentially longer trades, I guess.
I'm still trying to figure out what all goes into finding these triggers, but I do like the more laid back style of daytrading.
This guy has a free room with voice and irc accessible through http://www.traderalliance.com.
I kind of like scalping some, myself. But on some of the rougher days in the past few months when scalping wasn't working for me this guy was still pulling stuff out of the hat. And using fairly simple breakout play rules to trade them with. With full confirmation before entry.
I've tried and failed too many times at buying at or before the support or resistance line. Tough for a scalper to be so patient sometimes.
The main trader does his research each night and builds a list of stocks to watch for the next day. Then he watches them all very carefully, for strength or weakness.
When a stock is strong and it hits his `buy trigger' he trades it. He places his buy triggers above resistance for confirmation. He expects a minimum of a point from his trades and usually gets more, so confirmation makes a lot of sense.
If a stock is weak and it drops below support through a short trigger he enters his short trades.
Scalping is not the intent so confirmation makes a lot of sense. Also, contrary to another style posted earlier of taking a trade in the opposite direction if support or resistance isn't breached -- the strength/weakness factor keeps that from being an option. A tradeoff for potentially longer trades, I guess.
I'm still trying to figure out what all goes into finding these triggers, but I do like the more laid back style of daytrading.
This guy has a free room with voice and irc accessible through http://www.traderalliance.com.
I kind of like scalping some, myself. But on some of the rougher days in the past few months when scalping wasn't working for me this guy was still pulling stuff out of the hat. And using fairly simple breakout play rules to trade them with. With full confirmation before entry.
I've tried and failed too many times at buying at or before the support or resistance line. Tough for a scalper to be so patient sometimes.
Rfoulk-
What constitutes a stock being "weak" or "strong"? When a stock is "strong" does that mean it sticks to the support and resistance levels more? Is a "weak" stock a stock that moves too easily (very volatile)?
Praet-
When you bought AOL near the 50, was your main (and only, based on your post) buy signal the fact that it was near a resistance level and you were betting it would breakthrough, or were there other factors? I am still in the process of finding a high success rate of entry points (who isn't?), but it seems like all the indicators I use are just gambling. For example, I use the stochastics 1-min chart and the Moving Average chart, but most of the time you can't tell what's going on until it's too late. So I'm at the point now were I am slightly ahead of what I started with (eg., I'm not losing money really- just a little over breaking even). I need advice on what triggers you guys use. Thanks.
The Finn
What constitutes a stock being "weak" or "strong"? When a stock is "strong" does that mean it sticks to the support and resistance levels more? Is a "weak" stock a stock that moves too easily (very volatile)?
Praet-
When you bought AOL near the 50, was your main (and only, based on your post) buy signal the fact that it was near a resistance level and you were betting it would breakthrough, or were there other factors? I am still in the process of finding a high success rate of entry points (who isn't?), but it seems like all the indicators I use are just gambling. For example, I use the stochastics 1-min chart and the Moving Average chart, but most of the time you can't tell what's going on until it's too late. So I'm at the point now were I am slightly ahead of what I started with (eg., I'm not losing money really- just a little over breaking even). I need advice on what triggers you guys use. Thanks.
The Finn
No triggers. Way too much math. Just watch the specialist. It was obvious that aol was buying. Also it coincided with the futs making a hod. It had made a triangle under 50 intraday so that was the obvious move. I sold cause the futs didn't power through once they made that hod. I figured the specialist would short it. And he did after he sold.