I love trading breakouts.
Some traders hate them. Some traders say you can’t make any money with them. They say that everyone knows that breakouts are where the masses pile in.
I don’t know.
I think a lot of people fade breakouts. That’s like adding rocket fuel to a move as shorts get trapped, scrambling, looking for a way out as new buyers pile in and they get squeezed higher and higher.
Still, a lot of breakouts fail. But if you get the right one at the right time, and you manage to close your losers out for small losses when the breakouts turn to fakeouts, then you can do well.
Here’s a nice looking breakout. Would you buy it?
Would you buy this?
There’s a nice fakeout to the down side in late February, so you know there are already some trapped short sellers in that position. Do you think they’re closing now — or are they going to add to their positions and “average up”?
Still, the chart looks extended, doesn’t it?
I mean, the last swing low was down there at $2.85. Does this trade still have more room to grow?
And that’s another thing about breakouts, isn’t it? A lot of them look so extended when they break out of the base — but after that run-up, when the base shrinks on the chart — it looks so easy to call them.
Here that base is only 10% wide — but it looks much wider, doesn’t it?
So, would you buy this breakout? If you said yes, then congratulations, you were right…
$TINY moved up another 15% over the base.
Do you see how the base shrinks AFTER the takeoff making everything look so simple? I love that. It’s so deceiving.
I put up this chart because I like to look at what works. On winning charts you will start to notice some similarities, some patterns emerge. A large volume spike. A short side fakeout to the downside.
Still, breakouts fail just as much (and maybe more) than they work. But here’s the good part, it’s easy to tell if they fail.
And how will you tell? Simple. Price won’t go up. That’s really easy to remember, isn’t it? If price doesn’t go up, and slides back under the breakout area, your trade is a wash. Close it and move on.
Just like on the downside fakeout — those traders would have known that their short trade wasn’t working because price failed to go down. You would be surprised at how many people find that one simple fact about trading hard to act upon.
I think I’ll make this a regular staple here at RetailTRADER.
Until next time…