What to look for before a potential breakout?

From my experience most break outs fail and result in the transfer of money from main street to wall street. For some reason newer traders are drawn to breakouts, I know I was to begin with.

This said I will occasionally will get in on a breakout (perhaps 1 in 10 or 1 in 15 trades). I only do this though when I am sure of the higher time frame premise. Price would also have to have not moved much for the day in terms of it's ATR and ideally weekly ATR as well. It is of course preferable to get in way before the breakout and book profits when it fails. My breakout entries arise where I failed to get in earlier. Another opportunity with breakouts which is quite rare but viable is where you have a lot of higher time frame technical patterns that you can see are going to fail. There was one yesterday on british pound where Trend Line traders plus head and shoulders traders were trapped, it was clear if they puked price would likely spike quite a way as they rushed for the exit.

GL.
 
You have to first take a screen shot of the chart. it wont let you ppost url i think. You can use snipping tool which comes standard on all windows i think. type snipping tool in the search. Then snip the chart and save it to you desktop and then just drag the image to the reply box in the forums.
 
londonkid said:
From my experience most break outs fail and result in the transfer of money from main street to wall street. For some reason newer traders are drawn to breakouts, I know I was to begin with.

This said I will occasionally will get in on a breakout (perhaps 1 in 10 or 1 in 15 trades). I only do this though when I am sure of the higher time frame premise. Price would also have to have not moved much for the day in terms of it's ATR and ideally weekly ATR as well. It is of course preferable to get in way before the breakout and book profits when it fails. My breakout entries arise where I failed to get in earlier. Another opportunity with breakouts which is quite rare but viable is where you have a lot of higher time frame technical patterns that you can see are going to fail. There was one yesterday on british pound where Trend Line traders plus head and shoulders traders were trapped, it was clear if they puked price would likely spike quite a way as they rushed for the exit.

GL.
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But it seems the internet is filled with them trading breakouts from trendlines and patterns. I think it does work pretty well because a lot of newbies or people who were newbies saw these lessons and trade with them as well.
 
cashclay said:
But it seems the internet is filled with them trading breakouts from trendlines and patterns. I think it does work pretty well because a lot of newbies or people who were newbies saw these lessons and trade with them as well.
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By definition you want to be doing the opposite of what traders tend to do on forums/twitter etc. The herd normally gets crushed, not always right away but eventually. This is how the markets work they are designed for people to fail. GL
 
Orderflow is something I look at. What is happening on the Depth of market and tape? Are limit order traders absorbing the market orders or they pulling their limit orders? Are big traders hitting the market? Are the market order traders seeing results? Are they moving through price levels easily or are they grinding it up? Is the book firming up behind the move?

I have never been very good at reading chart patterns although I have studied Volman and Brooks. I keep an eye on the 70 tick chart (6E) due to the popularity of Volman's work but I can't trade like Bob and Al do. I think there are many people using the methods so it's worth watching.

I don't think "technical analysis" will tell you much except where price was "x" bars ago in relation to current price. Maybe it works for some people but it doesn't for me. The danger to those that use T/A is that the big traders know your game inside and out. They know where you enter and where your stop is likely to be.
 
wartrace said:
Is the book firming up behind the move?
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Specifically to that last one - if by behind the move you mean bidders bidding up a price or sellers selling down a price and the book reflecting that with additional orders etc. I think you'll find it to be opposite of how it appears most of the time (moves in to size, not moves with size). There's a couple threads on here that discuss this specifically, one really good one, but I can't remember the thread title.

wartrace said:
I don't think "technical analysis" will tell you much except where price was "x" bars ago in relation to current price. Maybe it works for some people but it doesn't for me. The danger to those that use T/A is that the big traders know your game inside and out. They know where you enter and where your stop is likely to be.
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At the minimum it should tell you where significant levels are and how the market responds around those area which is pretty important IMO. You're probably already using some form of analysis that takes this into account though.
 
i960 said:
Specifically to that last one - if by behind the move you mean bidders bidding up a price or sellers selling down a price and the book reflecting that with additional orders etc. I think you'll find it to be opposite of how it appears most of the time (moves in to size, not moves with size). There's a couple threads on here that discuss this specifically, one really good one, but I can't remember the thread title.
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I'm am talking about liquidity vacuum. Say the market orders are hitting the offers and moving up. You want to see the (limit) bids firm up behind the move (aka limit traders adding limit buy orders close to the inside bid). Looking at the book below on the buy side the book is "firm". Had the price just ticked up five ticks and you do NOT see the levels on the book increase into the hundred+ contracts as shown below it is not firming up. If instead of 20, 114,135,308 and 247 you saw 20, 45, 60, 85 and 100 it is not firming up and creating a situation where price is likely to reverse.

I am not talking about MARKET order traders. This only pertains to the limit order traders. There are other observations I made earlier about the market order guys.
Liquidity3.jpg
 
All I'm saying is that it usually moves towards the larger aggregate size. There are obviously cases where it moves strongly based on strong buying or selling but that's typically an exception.
 
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