When breakouts go bad — things can get hairy fast!
A bad breakout occurs whenever price breaks out of a range and then immediately turns around and closes back under the breakout zone.
When that happens you want to watch out. It could be a serious bull trap. And the last thing you want is to be caught in the exit doors when the herd is charging.
Here’s the chart:
Can I get an ouch!
That’s a 45% haircut that’s impossible to get away from because it’s a GAP DOWN.
When a gap down like that happens, it blows right through your stop and you get an exit at the first available opening price — 45% lower!
Not good at all.
The only warning sign that things weren’t going well here is the failed breakout. But you had to act fast. With maybe 1 day warning. That’s not a lot.
In the watchlist, all stocks are held with a -25% trailing stop. So this was still in the watchlist at the time of the gap.
So it’s a big loss.
Also, another lesson here — never put all of your cash into a single trade.
The all time highs watchlist contains 10 positions. So if you lost -45% on 1/10 of your equity you have really lost only -4.5% of total equity. Not good, but it’s not HALF of your equity.
Good luck out there.