Trading breakouts [By The Book]

K

konviction

My journal from last year http://www.elitetrader.com/vb/showthread.php?s=&threadid=213081&highlight=channel .

The last journal was a concept that I was testing, but found that I was doing some things fundamentally wrong.

1. I was doubling-down on losers. I knew going into the journal that this was a risky thing to do, but I thought it might be able to work. It didn't pan out.

2. There were too many rules for the system. It should be a lot more cut and dry and that's what I plan for this next one going forward. If you'd like to add your own modifications, do so at your own risk.

This journal for 2012 is about the bare-bones of trading. It's something all traders talk about and to varying degrees, have a solid understanding of: Support and Resistance

Most if not all the TA books make it look like technical analysis could be traded successfully by a 3rd grader, and after years of failure in this business and years of hindsight, it probably could be.

Hence the title of this thread "by the book".

Like many new traders in years past, I had beginners luck. I took those simple rules and applied it to my trading, and it worked... For a short while. Somewhere along the line I veered off course with all sorts of indicators and different systems.

If you're like me and you've been wanting to go back to the basics because you're just "tired of it all" and want to re-learn how to trade from the ground up, then welcome to "Trading Breakouts [By the book] "

Lets get started.
 
Got some ebay today on the 52wk break at 36.60. Got in kinda late tho. Stop at 34.60 .

Target is 44. I get this number using a projected trend line. I expect to see resistance at $40 from 10.8.07.

R/R on this trade is 3.7
 

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You're right, you are a bit late with your entry, but be patient and I think you'll do well with this one. There's a good chance it'll correct a little before it takes off again though. Can I ask why you have set yourself a target? I would wait and see how the stock behaves.
 
Quote from FreakofNature:

I enjoy your journals, wish you luck and good fortune on the new one.

FoN
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Thanks FON.

Here are some things I look for in my trades along with further analysis on ebay.



1. I wait for a bar to break and close above the resistance line.

2. I wait for the second bar to close above the first (with a solid body..hopefully stronger than the first) to indicate bullish momentum. This is the candle where I buy

side note: Spinning tops and doji's are not good candles to see near these support/resistance points because they show that both sides are indecisive about direction. If a doji or spinning tops occurs after the breakout candle, wait for a 3rd candle to hopefully close higher.

side note: If the second candle closes higher BUT has lower lows than the first breakout candle, take caution. Also avoid a trade if proceeding candles are making higher highs and lower lows. This is called a "reverse triangle" ( http://www.thepatternsite.com/EWRevSymmetrical.html ) are are dangerous

3. Once I buy, I need to put in a stop. This is where risk/reward comes into play. The distance of your stops will vary from trade to trade depending on the stock and how aggressive price action gets. I aim for a r/r of 1 to 3. Having a good r/r is especially important in breakout trading due to the high number of false signals that occur

You'll notice my stop on ebay is right under the strong breakout bar at 34.60. Have your stops under solid price bars but close to the s/r line.

side note Buying near the market close (about the last hour or so) will give you the added protection of knowing price will close strong. Buying in the morning can be risky if the market turns or news comes out.

4. Move stops to b/e asap. Once price rises to cover your trade, move to break even. Even a pop above s/r can be a short run so be prepared!.


now to analyze ebay.

1. The filled-blue arrow indicates the breakout candle.

2. blue arrow points to the spinning top. It closed higher and made higher highs BUT there were barley enough buyers to make a difference. Take caution.

3. Orange arrow. Sure enough, price pulled back off this resistance line. This is WHY you don't buy the breakout candles alone.

4. Buyers came back with a vengeance and pushed price to 36. Buy at the close.

5. Place stops under the resistance line, under a strong candle (if you can find one)

6. Move stops to break even once you make a few bucks to cover commission.
 

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Quote from Cherrypicker:

You're right, you are a bit late with your entry, but be patient and I think you'll do well with this one. There's a good chance it'll correct a little before it takes off again though. Can I ask why you have set yourself a target? I would wait and see how the stock behaves.
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I've been "groomed" so to speak that it's important to have a risk/reward ratio. I can't get this ratio if I don't have a target in mind. It just helps with my planning process. If I have to decide on two trades, I can pick the one that has the best reward possibility.

Also after I get some more trades under my belt, I'll be able to figure an average r/r. Sometimes it's easier to put things in ratio perspective than to simply say "well I normally lose 125 but I normally make 350"
 
Quote from safvanmalik:

Every method has a time line. Breakout methods work best in healthy markets like it has been recently.
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yes, when bullish :) . If the market turns sour, then I can always short the breaks to the downside. Easier said than done tho haha.
 
MHS. Showing weakness on both daily and weekly near this resistance level. Both are closing as pin bars (inverted hammers). However a look at the monthly suggest bullish direction on strong volume.

I'm guessing that for the rest of this week and maybe 1st week of march we might see a pullback on price before a second attempt higher?...

Pins and hammers are strong bars in themselves. I know on the forex boards at Forexfactory, entire journals have been started with just these two bars.

I might short this if I see a close lower tomorrow..
 
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