Hello Mike,
An appreciative follower here. There’s this question that has been floating in my head. I’m reaching out to you for abetter answer.
When do you pay for breakout plays out of a range or through a key resistance? Do you:
1. get in earlier at a better price anticipating the breakout
2. hit the offer as soon as the key level breaks
3. sit back on the bid waiting for a pullback from that breakout
Now I understand that it all depends on the trade or confidence in the trade. But how do you measure that?
Here are the things I personally identified:
1. Market and sector condition tells me whether I should anticipate the breakout.
2. How extended that stock is and where it came from before taking out that key level. This should tell me whether there is a good chance of a pullback or we are still at the base of a run.
3. Volume on breakout tells me whether I should pay the offer or wait for a better entry.
I’d love to hear your take on this.
Still working on my game. It’s a never ending journey but I will never quit. Preserving my capital has been my number one rule so I can sustain long enough.
Bella Responds
SMB Readers,
What is your response to the questions above?
Bella
11 Comments on “Traders Ask: How do you play a breakout trade?”
– Check broad market and sector strength.
– Check if there is a anything from the news that make the stock strong.
– How important is the level (scale from 1 to 10). (intra-day time-frame and longer time-frame)
– Volume on the breakout should be relatively high.
– If the stock was in consolidation range, how tight is the range?
When breaking above that resistance check for confirmation from the Tape and wait to hold above that level for a conservative entry.
hit the offer as soon as the key level breaks, momentum is everything, and there may be no pull backs thus lost in opportunity
I am personally a bad momentum trader, something I need to work on, so I rarely pay up offers. My type of trading is to either wait for pull back from break out to see how strong the support is, and I can specifically define my risk by doing this. Or at times I would get in ahead and anticipate the breakout, but only after at least 2 or 3 times of prior testing resistance level and I recognize the pattern whether it be a flag or etc. and a clear defined risk from support.
Suggestion #3. “sit back on the bid waiting for a pullback from that breakout” doesn’t make sense to me at all unless you missed the breakout or you want to buy on pullback below the breakout level (in case you think it’s just a shakeout).
Otherwise, the things you “personally identified” sound wise to me
Paying the offer right on the breakout will get you punished. Look at GES on 5/26 between 10:30 and 11:00. $45 was clearly resistance but it popped over 5 times before it finally broke down. Gman even talks about this for DIS on 5/11. $42.40 was clearly resistance after 10:15 but see how it pops that price over before the breakdown. I don’t know if they are algos are not but it seems to happen pretty often. How can you tell if it is a real breakout or an algo flush before the breakdown? That is a complex issue and I’d like to hear somebody from SMB talk about it but for me the reaction of the bid is the tell- when you see prints below the bid (the red box prints), if the bid is resilient, meaning it stays above those lower prints, then most likely the bid will rebound quickly back to the breakout price. However if the bid drops below those prints- meaning that the bid is now below prints that were below the bid just a moment earlier- then it is likely the price will fall below the initial breakout price and you will be caught on the wrong side if you are long.
The interesting thing I notice with all of the comments, is you all have a different approach, and you are all correct! I think thats the point, You have to determine which type of trader you are.
I do all three of your alternatives: anticipate, lift offer directly and also waiting for pullbacks. It depends on what led up to the breakout. Who’s buying and why. Sometimes it’s really set up for a breakout, then I anticipate by working a favorable bid or lift offer directly after. The cost of missing the entire breakout by waiting for a pullback is rather high… However, many times the move isn’t as strong and then the expected value of being agressive by lifting offer directly after the breakout probably is negative. That’s my experience anyhow. I feel that anticipating by patiently working a bid before a breakout has a limited downside, if you’re quick to exit should it go down.
I’d LOVE to hear what the SMB ppl says about this, since I also have been wondering a lot about how other ppl do this. I’m self-taught.
Trade the failure of the breakout. If chart is looking like a possible great breakout, one that a bunch of traders are most likely salivating at, watch for the break and a ton of traders to jump in. If by chance the breakout does not hold and reverts back, you now have a bunch of trapped traders with their pants down. Take the opposite position. Clearly defined risk if the breakout does infact continue. You are siding with the bots on this as well.
I think the key here for me is a scaling-in approach.
If I plan to take 5 units of risk I will do the following.
Say your breakout play is in the form of a A.Triangle bullish play. Feeling pretty confident in the breakout I may take 1 to 2 units of risk during the construction of the A. Triangle near the apex.
If the A. Triangle fails ill take the loss on say, the 2 units of risk.
If we see the breakout, I buy offer 1 unit of risk. Once I get about a dime. I will scalp that 1 unit of risk and bid 2 units of risk on the breakout line.
If I get taken on my bid I now have 4/5 units of risk.
I will add back my 5th unit on the break of the breakout high. Once I have 5/5 units of risk I will move my stop to below the pull-back low.
From here I would trade around a 3/5 units core position. By scaling in and out.
Breakouts seem to fail more often than succeed to me. I’ve switched from trading the breakout to anticipating it earlier and entering. I find this often allows me a larger R:R and gives more room to stay in the trade should it slump back into the range. I then hope to add if the break holds and the markets strong.
I keep meaning to put together a strategy for trading the failed breakout in the opposite direction.
Take your unique perspective on the market and develop them. Your unique perspective is what makes you valuable. I would suggest starting a private blog that you can use to study your own breakout trades. Every day you can post breakout trades that belong to;
1. get in earlier at a better price anticipating the breakout
2. hit the offer as soon as the key level breaks
3. sit back on the bid waiting for a pullback from that breakoutOver time you will have an idea of what chart setups are going to make you do 1, 2 or 3.