How to Avoid False Breakouts?

[Fran8]

Hi everyone

I always trade breakouts never retracements beacuse I always get burnt. With breakouts the direction that the stock is taking is obvious and the stop are easier set.

I guess that many many people use the same strategy since there are thousend of followers of William Oneill, Darvas and Livermore etc. All of them say that volume was very important to determine if it was a True Breakout. William Oneill says that is not that difficult to find tru breakouts but Darvas also say that his system will only be right half the time that is 50% of the time.

I guess that Oneill says that is easy to find to breakout just looking at the volume but if you are not sit infront of the computer the whole day it may not be that easy, that is probably why Darvas say that his system was going to work only half the time beacuse he did not know untile the day after the volume of the breakout.

One of the most simple solutions may be to wait for the breakout to happen and then enter the trade the day after when you see that the breakout was on big volume, one of the problems of this is that sometimes the price runsaway from the breakout point and then yor risk is higher.

Please could you share some techniques that you use to face this problem, at the moment what Darvas says is correct, Im correct about half the time and Im doing ok since I set up the stop loss very close and my wins are bigger than my losses but I will like to increase the entry percentage to 60% and put the odds more in my favor I know than higher than 60% is very unrealistic since no method is perfect.
Thanks

 

[meanreversion]

I wouldn't worry so much about your entry point. The exit strategy will determine your profitability in the end - which method do you use there?

 

[Black Swan]

Don't trade...endex..

 

[Dubai]

If you're winning more than you're losing, what's the problem?

Don't fix what isn't broken imo. Perfection is never obtainable and false moves will always happen.

 

[tomorton]

I don't know of any method that will eliminate significant percentages of false breakouts while confirming entry on true breakouts (but no doubt someone will come on here and tell us that only discretionary traders can do this and we're all fools and blah blah blah).

Back in the real world, trading breakouts is in two ways like catching a bus. Firstly, if you miss this one there will definitely be another in a few minutes: so don't kill yourself running across traffic to get on board quickly.

Secondly, if you do find you're on the wrong bus, the only right thing to do is get off. So, when would you get off? Would it be right away, because it's the wrong bus, or would you sit back and take a little ride and see where it takes you for a few hours? Most people would get off as soon as they realised their mistake. As a trader, follow this simple rule.

 

[DionysusToast]

Breakouts are a much tougher game than retracements IMO. Going long at the high of the day is a tougher game than shorting the high of the day (at least on the ES). Consider breakouts to the long side in this post...

If you trade retracements, your trade has much more room to breathe than a breakout trade. At the point am instrument breaks out, it's more than likely getting ready to make a new retracement which will most likely be back through your entry point. So - you can't realistically expect a trade which sits in profit right from your entry if you trade breakouts. So - breakout trading will have you sweating a lot more. If you really want to trade breakouts, you should get in prior to the breakout point, not have a stop entry above the high. With breakouts, you are buying when others are buying. Not the best way to get filled.

If you trade retracements, then you are buying when others are selling. Nice way to get filled. You are getting in when others are going short and so will benefit from their exits when you are right and they are wrong. Better still a retracement lets you have a stop hanging out in mid air where there are unlikely to be other stops. On a breakout, where will your stop be ? A tick below the prior swing low on a long trade ?

The problem with retracements is how to know the retracement is over. Anyone with a pair of eyes can see the breakout point. The point at which a retracement is done is rather more elusive, hence all that 'nonsense' about tape reading.

As to whether a breakout will be succesful - it could well be succesful, clear out stops and then move in the opposite direction. At times you can tell from the tape/DOM if the high will be breached but rarely can you see if it's going to move on significantly IMO.

 

[meanreversion]

This might just be me, but I looked very hard for a consistently profitable (i.e. over 5-10 years) mechanical retracement system when backtesting and I couldn't find one. Not to say it can't be done in a discretionary way, of course. (or maybe I didn't look hard enough)

 

[Black Swan]

Look, what you're really asking is how do I trade without losing..ever...can't be done. Whatever strat you employ you will get losers, live with it, embrace it, deal with it...

 

[Fran8]

The problem that I have with retracemnents is exactly what Dionysus Toast mentios is that I never get right when the retracement is over and breakouts are very clear also true that they are clear to everyone. i do not want a perfect system like some of you say is clear to me that this is impossible. But many people use the close + atr or high +atr, or close higher than breakout or something like that. So guys you think that will improve your success entry rate ompare to just buying the breakout?

 

[DionysusToast]

This might just be me, but I looked very hard for a consistently profitable (i.e. over 5-10 years) mechanical retracement system when backtesting and I couldn't find one. Not to say it can't be done in a discretionary way, of course. (or maybe I didn't look hard enough)

Step 1 - Identify the point at which you think it buyers should step back in on a retracement
Step 2 - Look to see if they actually do, along with signs of the sellers getting weaker
Step 3 - Know that the more confirmation you wait for, the worse your entry

I think it's step 2 that the chart-only traders struggle with.

Here's one I just did- literally just hit my stop. Also with notes from my journal which may be like garbage to anyone other than me...

T1 - NQ Today 11:12
Looking for a retracement to trade...
NQ Made a down move and then retraced backto 2130-ish where it started to look weak. Shorted at 2129.25. Final target is 2117-2119 area. Took 3 or 4 ticks of heat on the trade at entry, then it started to move down. First target filled at 2126.50. As it got down to the prior swing low at 2123.50 , it pierced by a tick and then bounced a little, so set stop to break even. Price moved up to 2127.75 and back down to 2123.25 and looked like 2123.25 might hold. 2123 broke but then price came back. At this point moved stop down to 2128.00. T1 - +$55, T2 +$20

Not sure this makes much sense...

 

[trader_dante]

Hi everyone

I always trade breakouts never retracements beacuse I always get burnt. With breakouts the direction that the stock is taking is obvious and the stop are easier set.

I guess that many many people use the same strategy since there are thousend of followers of William Oneill, Darvas and Livermore etc. All of them say that volume was very important to determine if it was a True Breakout. William Oneill says that is not that difficult to find tru breakouts but Darvas also say that his system will only be right half the time that is 50% of the time.

I guess that Oneill says that is easy to find to breakout just looking at the volume but if you are not sit infront of the computer the whole day it may not be that easy, that is probably why Darvas say that his system was going to work only half the time beacuse he did not know untile the day after the volume of the breakout.

One of the most simple solutions may be to wait for the breakout to happen and then enter the trade the day after when you see that the breakout was on big volume, one of the problems of this is that sometimes the price runsaway from the breakout point and then yor risk is higher.

Please could you share some techniques that you use to face this problem, at the moment what Darvas says is correct, Im correct about half the time and Im doing ok since I set up the stop loss very close and my wins are bigger than my losses but I will like to increase the entry percentage to 60% and put the odds more in my favor I know than higher than 60% is very unrealistic since no method is perfect.
Thanks

I'll show you my particular solution. You can get a much higher win percentage than 60%. I'm not familiar with stocks. I think they are somewhat of a different breed to what I trade but let's take a look. First, can you post your next candidate for a breakout in real time? That way we can assess what you consider a breakout which is most important. Also, we don't have any hindsight nonsense.

 

[Fran8]

Is Apple I do not know if on the graph is clear

 

[Fran8]

I do not know how to make it bigger

 

[trader_dante]

Is Apple I do not know if on the graph is clear

Where is the potential breakout here?

 

[redart]

I do not know how to make it bigger

chart's fine. Gets bigger when you click on it.

but im not sure what breakout you are talking about??

You mean to get long if it breaks the current HOD??

 

[Fran8]

Exactly I mean to go long if it goes back up an breaks the previous high

 

[trader_dante]

Exactly I mean to go long if it goes back up an breaks the previous high

Right, obviously, I got the wrong end of the stick. Buying a break to a new swing high is not what I call a breakout.

 

[DionysusToast]

You mean long if it breaks the prior swing high about $320 ?

 

[redart]

or do you mean as a daytrade if it breaks 304.65

 

[Fran8]

I mean when the stock breaks 320 aprox on my chart, what do you guys call a breakout?