Why you shouldn’t trade breakouts
Dave Landry is principal of Sentive Trading, a money management firm, and a
principal of Harvest Capital Management. Mr. Landry is the author of two top
selling books,
>Dave Landry’s 10 Best Swing Trader Patterns And Strategies and
>Dave Landry On Swing Trading.
If you would like a free trial to Dave’s Nightly Swing Trading Alerts Report
Smoke ’em If You Got ’em
As I’ve mentioned in the past: Money management–the use of protective stops, trailing stops, and profit taking–is crucial to your long-term success as a trader. A simple money management system is to take at least half of your profits when they are equal to or exceed your initial risk. You then move you protective stop on your remaining shares to breakeven. This way, barring overnight gaps, you have a “free” position that has the potential to turn into a homerun (through the use of trailing stops).Â
Let’s follow up on Ultra Petroleum
(
UPL |
Quote |
Chart |
News |
PowerRating), the last stock mentioned
in this column. Below is the chart I published last Tuesday. Notice that the
stock was set up as a First Thrust (email me if you need the rules for the
pattern).Â
Following the rules outlined in my Swing Trade Primer (email me if you need a
copy), notice below that the stock triggered an entry, and then subsequently
began to sell off. Partial profits could (and should) have been taken, the stop was moved to breakeven,
and
then it is trailed on a three point basis. As you can see, these simple techniques can
help to position you for a potential homerun. I’ll follow up on this one
in Wednesday’s presentation (see below).Â
On Tuesday, the Nasdaq opened lower, bounced, but quickly turned
back down and sold off hard. It found its late-morning trading and then
traded mostly sideways for the remainder of the day. Â This action has it
closing poorly.Â
The Ps put in a similar performance.Â
So What Do We Do? On Monday, the S&P hit its highest level in
nearly 5-years. However, in spite of this positive, it sold off hard on Tuesday.
This exemplifies why I am NOT a breakout trader–markets are prone to false
breakouts. This action keeps the big blue arrows pointing sideways. And, as
you know, this does not bode well for the momentum based
trader. Therefore, avoid initiating new trades. If you took trades in recently
mentioned areas such as gold, metals & mining, and
the energies, look to “scale and trail.” (e.g. the UPL example
above).Â
There weren’t any meaningful setups tonight (Tuesday). This makes sense for a
range-bound market.Â
Weekly Interactive Lesson
It’s that time again. On
Wednesday 3/01/06 at 11:00 AM EST, I will be hosting my weekly interactive
lesson. In addition to the above, yet again, I have some great examples (if I say so
myself!). I also plan on covering 12 steps you can take to improve your trading.
As usual, admission is free (and I give money back guarantees if not completely
satisfied!) but the
space is limited by the software. Email me if you need instructions on how to
join (the same each week) or if you would like the archives for the prior year
(covering topics such as money & position management, scanning,
picking the best setups, sectors, longer-term trend following and a plethora of
other stuff).Â
Best of luck with your trading on Wednesday!
Dave Landry
P.S. Reminder: Protective stops on every trade!
P.P.S. If you would like a free
trial to my trading service, click
here.
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