≈ 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?
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?
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.
Video of the day
Join Coach Tyler, Greg and Jake for another edition of Trade Masters
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.
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.
Cash Flow Club 8:30 PM EST
Join Greg Holmes as he hosts the weekly cash flow blub
Financial freedom is a journey
Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.
Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.
All investing and trading in the securities market involves a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax and accounting advisers, to determine whether such trading or investment is appropriate for that user.