PowerRatings Danger Zone: APOG, STEC, JBL, WBMD, TZOO
When markets are moving up, are you chasing stocks higher or looking for opportunities to take the other side of those “buy high, sell higher” trades?
As someone who has followed and traded based on momentum for years, I can certainly understand the temptation to buy breakouts and sell breakdown. And there are a number of traders who can and have bought breakouts and sold breakdowns successfully.
But are breakouts the only way to trade stocks? Are they the highest percentage way to buy stocks over the short term?
Interestingly, some of the traders who use breakout strategies most widely aren’t short term traders. They are long term trend traders who use technical triggers like 20-day highs in order to initiate trades that may last for weeks, months or even longer. It all depends on the trend.
Now just because trend traders–known for their willingness to endure 20%, 30% or even 50% drawdowns–are among the biggest users of breakouts strategies to enter trades is no reason for short term traders to forsake breakouts. But I’ll admit the thought does give me a bit of caution.
Why? Because breakouts notoriously fail—