To buy or not to buy breakouts
A reader asked why I prefer breakouts and why not buy retracements on 100% plus or IBD 200.
As I have said earlier the exact entry methods play small role in why the concept like 100% plus or IBD 200 works. The vehicle selection in both the cases increases probability of success irrespective of your entry. Those stocks for a specified period have high probability of going up.
But buying breakouts has higher probability of success on such stocks than retracements. There are number of ways to look at it. Prices move in spurts. So a 4% plus move leads to few weeks of move in intended direction. When a stock goes up it attracts more attention and more buyers. That is the visibility effect.
When you are buying breakouts , you are paying for confirmation. Your stops are wider as compared to retracement entry. The risk in breakout buying is , it will fail. The risk in retracement buying is also that it will fail to signal reversal and in fact might be a start of long down trend.
In both entries if it is successful, your trade is profitable. The advantage of retracement is you will quickly move in to profits if the trend resumes. Irrespective of method, you will get stopped out on your stop.
To design retracement based entries, you need to think a logical entry point. You need to use a leading indicator to signal this. Unfortunately there are no perfect indicator.
I have tried many retracement based methods on both the list. Some things which work are based on liquidity going down to signal entry. Especially if you are looking for very short duration trades on 100 % plus or IBD list, you can try entry a day after lowest volume on 20 days. (v=minv20)
I personaly find breakout easier to trade.
As I have said earlier the exact entry methods play small role in why the concept like 100% plus or IBD 200 works. The vehicle selection in both the cases increases probability of success irrespective of your entry. Those stocks for a specified period have high probability of going up.
But buying breakouts has higher probability of success on such stocks than retracements. There are number of ways to look at it. Prices move in spurts. So a 4% plus move leads to few weeks of move in intended direction. When a stock goes up it attracts more attention and more buyers. That is the visibility effect.
When you are buying breakouts , you are paying for confirmation. Your stops are wider as compared to retracement entry. The risk in breakout buying is , it will fail. The risk in retracement buying is also that it will fail to signal reversal and in fact might be a start of long down trend.
In both entries if it is successful, your trade is profitable. The advantage of retracement is you will quickly move in to profits if the trend resumes. Irrespective of method, you will get stopped out on your stop.
To design retracement based entries, you need to think a logical entry point. You need to use a leading indicator to signal this. Unfortunately there are no perfect indicator.
I have tried many retracement based methods on both the list. Some things which work are based on liquidity going down to signal entry. Especially if you are looking for very short duration trades on 100 % plus or IBD list, you can try entry a day after lowest volume on 20 days. (v=minv20)
I personaly find breakout easier to trade.
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10 comments:
yeah, but dont you find that most breakouts retrace, at least somewhat?
what if you buy a breakout after it has retraced?
i am a little confused about the fundamental difference...
A breakout might have first retracement after 50% move and if you buy that retracement the next move might be just 10%. So waiting for retracement will ensure missing on the major opportunity.
Breakouts, I am talking about are on IBD200 or 100%. Breakouts on other stocks may or may not retrace. high momentum stocks behave differently. High float and large cap behave differently. Large float stocks tend to retrace more often.
gotcha - thanks
in previous post, you mentioned buying more if it closes at top of range... that's because you have observed that when breakout closes at top of range, the next day is pretty much always positive, gap up, etc.?
Yes. But I am looking at holding this for longer period till I get stopped out. Not looking at just next day move.
I look for retracements on a weekly basis. One red candle on the weekly chart is all that you get sometimes. Check your favorite breakout stock for this pattern.
Does this buy breakout also has to satisfy your rules such as "growth in 260 days" etc?
I was looking random stock broke out recently to test the theory. eg: IPII, broke out 3 time recently and if you bought on the 2nd day after breakout, it retraceback and might get stoppedout. same as AVNR, broke out with large volumn, closed at top of range, if bought on 2nd day, it would be a losing trade. MNTA seems to be good if bought on 2nd day, but it didnt have much volumn surge. What criteria would you be looking at when buying break out stocks the 2nd day? thanks
Susan
My observations are based on primarily 100% plus list and IBD 200.
As I have said there is nothing wrong with buying retracements or breakouts. Traders personal psychology and deeply held beliefs determine what they will be more comfortable trading.
Stocks with higher relative strength and in runaway mode do not offer very profitable retracement entries based on my experience and research.
how do you identify a runaway gap versus a breakaway, exhaustion gap? apologies for so many question, been looking at gaps for >months and find it hard to recognise which is a profitable one and which is not. you insight would be appreicate it.
First gap at the beginning of move is breakaway gap. In retrospect if it does not get filled.
Subsequent gaps are runway gaps.
A gap at the end of move is called exhaustion gap. Again, it is runway till subsequent action proves it to be exhaustion gap.
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