Here’s The Truth About Breakouts
Email of the
day:
“Hi Rob. Recently I bought a
bunch of breakouts. XXIA, TZOO, TASR, JUPM, among others. All of these failed
after the market dumped {last week}…how reliable are breakouts if every time the
market has a distribution day or two, they keep failing?â€Â
    – R
Preface:Â I love trading
breakouts. Breakout trading constitutes are large portion of my efforts and
success.
Answer: Breakouts aren’t
reliable.
Most intermediate-term growth
traders would have you think otherwise. When people read a book about growth
investing, it all sounds so simple. Find a good stock. Wait for the basing
formation to complete. When it breaks out, buy it. Use a stop in case
you’re wrong. Breakout traders can show you tons of charts that show successful
breakouts. When it works, it can be very, very, powerful. The problem that
most people have when they begin trading breakouts it is that they don’t realize
the winning percentage isn’t very high. Very few breakouts go on to realize
huge gains. Some do — and they are the ones that make it all worthwhile. As
I’ve said before, growth investing isn’t a money-machine, it’s a treasure hunt.Â
Therefore it requires a treasure-hunt mindset.
If reliability is important to
you, then there are many other ways to trade with more reliable results. Many
of the short-term trading techniques I’ve used over the years are successful for
me about 65% of the time. A long string of losses is rare, although there are
ebbs and flows like everything else. My intermediate-term breakout trades are
successful more like 15% (maybe 20%) of the time, yet I will almost always make
more from them over the course of the year. One method is consistent and gets a
bunch of singles while the other method strikes out a lot but more than makes up
for it with a good number of home runs.
Traders can make money an
infinite number of ways. Make sure you understand and can handle to drawbacks
associated with your particular strategies. If reliability is your primary
objective, intermediate-term breakouts may not be the best strategy for you. If
home-run potential is your primary objective, then you can’t do much better.Â
Index Action
The index that stood out in my
eyes today was the VIX. It didn’t take much of a rebound today to get the VIX
to sell of sharply. While the S&P 500 finished the day up less than 0.5%, the
VIX spiked down and closed more than 5% below its 10-day moving average.Â
Obviously a little more skepticism associated with a bounce would be
preferable. Should this bounce persist for another day or two, keep an eye on
the VIX to see if it continues to stretch further southward. If this occurs, it
could signal some shorting opportunities.
Best of luck with your trading,
Rob
P.S. Check out my new
Hanna ETF Money Flow System!
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