How To Fight Against "Failed Breakouts" ?

hey guys. 

Here's a great question: i got on the blog today: I thought is was important enough to share it. 

Hi Stewie

From the USG chart, a breakout of 20.25 should be bullish. However, when looking back at the one day chart after the fact, this stock did cross 20.25 but quickly reversed downwards. How should we prevent ourselves from being caught in the stock only to let it drop in price soon after. I think that this is one of the challenges that I face when trading - getting sucked into a failed breakout.

July 17, 2012 6:44 AM

traderstewie said...

that's a great question. My way of fighting "failed breakouts", or CHOPPY MARKETS basically. We need to look at overall MARKET CONDITIONS. Lately, market conditions have NOT been favorable for "clean" breakout trading. Most bullish charts that i watch for breakouts do end up working out as i expected BUT often times, there is LOTS OF whipsaws before the eventual move. So i personally, prefer to enter trades well ahead of the BREAKOUT numbers that i am watching. Because, this way i get into the trade early and then that gives me enough "cushion" to judge whether, the BREAKOUT IS FOR REAL or not. Obviously, sometimes, breakout will look for real, then FAIL. and sometimes, breakouts will look fake, but then move as expected the following DAY or maybe, after a fake reversal DOWN to take out stop losses at 'obvious locations'. All this is classic, low volume, choppy market behavior. When is see this sort of action, i immediately wanna do 3 THINGS:

1: that's to LOWER MY TRADING activity and only focus on what i think are A+ setups(sometimes you'll get em right, sometimes, you'll get em wrong but focus on A_+ setups, TRADE LESS).

2: I wanna enter these HIGH probability setups AHEAD of the breakouts. This gives me enough cushion to judge whether a breakout is working and riding a bigger trend(hopefully). if the breakout starts to act funny or suspicious, i typically wanna get out manually or via a RAISED STOP LOSS which is something i do often(sometimes i raise stops way too soon to be honest) but it's my inherent distrust for stocks that makes me do that. Lol! I know that the longer, stocks are held, the more likely, you are going to experience some sort of fuckery whether it be : analyst downgrades, Secondaries, earnings surprises etc etc.
in my book, the less you hold a stock, the better.

3: When the market chops or sees many failed breakouts(i see this often as a "tired market" or a market that is "topping out" in some ways), i typically, prefer to BOOK GAINS fast. obviously, often times, you will leave some profits on the table sometimes but in most cases, there is nothing wrong with LOOKING FOR A+ setups, timing a proper a entry and booking GAINS FAST when trends are not lasting. Lack of clear trends creates many failed moves, UP and DOWN.

I can go on and on on this topic. I encourage you to check out some videos i made on trades i normally take and how i play breakouts:http://artoftrading.net/trading-education

I hope this helps! cheers.