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Tackle Today: Breakouts and Price Filters

April 29, 2021

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Come close and learn of confirmation.


One way to increase your ability to spot real breakouts versus their fake counterparts is to use a price filter. Say a stock has resistance at $50. If prices rally to $50.01, are you confident it’s a legitimate breakout?

I’m not!

The market is not a scientific machine. It’s a game run by emotion-riddled, biological beings. Support and resistance are zones, not prices to the penny. As a result, it’s often best to wait for slightly more confirmation to avoid getting suckered into trades on noise.

That’s what a price filter is designed to do.

If resistance is $50 and a stock rips to $55, are you confident it’s a legitimate breakout?

I am!

It rose 10% above the ceiling. If that’s not confirmation, then I don’t know what is.

The concept here is simple. The higher a price rises after breaching resistance, the more likely the breakout sticks. Of course, if you’re trying to buy a stock on the breakout, you can’t wait too long, or else you’ll have missed the move.

Opinions vary on how long you need to wait, but one rule of thumb is to wait until a stock rises 10% of an ATR above resistance before buying.

Suppose in our $50 stock example above, the ATR was $5. 10% of $5 is 50 cents. If I were using this rule, I would place my entry order 50 cents above resistance or $50.50.


Chart of the Day

MT Daily Chart

ArcelorMittal (MT) has resistance at $30.46 and an ATR of 86 cents. If you were trading the breakout and wanted to ensure you had some price confirmation, you could place your entry order trigger 8.6 cents (rounded to nine cents) above resistance. That comes out to $30.55.

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