Breakout or Fakeout?
If patterns never failed, then trading would be a cinch. Find a bull breakout setup, queue up your order, and watch the profits flow into your account.
Unfortunately, real life is a great deal messier. Some fakeouts masquerade as breakouts. Then, they stab you in the back.
This truth begs the question: can you tell the difference between the two ahead of time? Is it possible to know if a breakout will stick or reverse before placing your trade? Not really. You can make sure you focus on quality setups versus crappy ones. But even then, the quality breakout patterns can still fail.
That’s what stop losses are for, though. Minimize the damage on the fakeouts while maximizing the returns on legitimate breakouts. That’s the formula for long-term profits.
But if you’re trying to identify if a breakout is legit as it’s happening or a few days after the fact, then these three filters can help: price, time, volume.
The higher the price goes after breaching resistance, the more likely it’s a valid breakout.
The more days it spends above resistance, the more likely it’s a valid breakout.
The more volume or participation during the breakout, the more likely it’s valid.
Over the next three messages, we’ll explore each in greater detail.
Chart of the Day
Anatomy of a Quality Bull Breakout
FCX has had many quality breakouts along the way. The one that arrived on December 30th had all the makings of a legitimate break. First, the price exceeded the $25.50 resistance zone by as much as 5% on the break. Second, the volume exploded. Third, the price remained above the breakout area for the next four days.
Video of the day
The Queen’s Court
Traders Lounge 11 AM EST
Join the coaches in this live lounge, ask questions, discuss ideas or just sit back and listen to veteran traders discuss market conditions.
Trading Lounge at Night 8:30 PM EST
Join Greg Holmes tonight as he hosts the second of our Trading Lounges today.
Halftime Report 12:30 PM EST
The Halftime Report starts at 12:30 EST and covers what news is driving the market, chart analysis from the movers and shakers of the day and fun in a way that only Matt and Tim can deliver.
Trade Masters 7:00 pm EST
Join us for a special webinar with the coaches where they’ll analyze some trade setups.
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