Create a System to Trade Breakouts

Steve SpencerPartner

SMB TrainingJuly 18, 2013

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Please note: Hypothetical computer simulated performance results are believed to be accurately presented. However, they are not guaranteed as to accuracy or completeness and are subject to change without any notice. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Since, also, the trades have not actually been executed; the results may have been under or over compensated for the impact, if any, of certain market factors such as liquidity, slippage and commissions. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any portfolio will, or is likely to achieve profits or losses similar to those shown. All investments and trades carry risks.”

Price moves above/below an important price

Intra-day breakouts◦ Opening Range◦ LOD/HOD◦ Large Buyer/Larger Seller

Multi-day breakouts◦ H/L of established ranges◦ Intermediate Breakout vs. Full Breakout

What is a Breakout?

It trends until there is sufficient supply to end trend then it establishes a new trading range

What happens when a Stock has a Breakout?

An imbalance of supply/demand causes a breakout◦ Either buyers or sellers become more aggressive

as their isn’t sufficient supply to meet demand

Therefore a breakout should be a signal that a large move is about to occur

What causes a breakout?

There isn’t a sustained imbalance of supply

How do we spot these failures? TIME◦ The simplest way to judge a failed breakout is a failure to

hold above/below the breakout price for your trading time frame

Mispricing when the market opens◦ These quickly correct ◦ A lack of liquidity in the first 15 minutes causes stocks to

move through important levels until more orders enter◦ This has become extremely prevalent in past decade as HFT

are primary market makers and don’t want to risk capital right on market Open

Why do so many breakouts fail?

Stocks In Play

I have 3 resources◦ SMB Scanner◦ StockTwits◦ SMB Radar

I also have my “MoMo” list of stocks◦ LNKD, NFLX, GMCR, FSLR, CREE

How do we find potential breakout stocks?

SMB Radar – In Play

SMB Scanner

Let me offer a few things for you to consider prior to committing to a breakout trade.

The list of things to consider from the blog…

1. How significant is the level that the stock is about to break through?The significance of the level is determined by how many market participants are focused on the level.

2. Is the breakout occurring from a base or has the stock been trending in the direction of the break for several days already?

• A break that occurs after an extended move may offer less upside initially, but over time match the magnitude of a break from a base

• A break from an extended move is far more likely to fail initially

• A break from a base that has a surge in volume will follow through 80% of the time

3. How much room is there to the next significant support/resistance area?If the next S/R area isn’t at least 3X the risk of entering trade than not particularly good opportunity

4. What type of market are we in? Uptrend/Downtrend/RangeUptrend is best market for sustained breakouts in either direction

5. What is the price action history of the stock on prior breakouts?

• This is such an important factor as stocks will continue to have the same many of the same participants over time and traders like most human beings are repetitive in their behavior

• What does the stock typically do on the first day of a breakout, second day, third day etc....

6. How much time above/below a breakout level is sufficient to consider the breakout successful and thus worth committing additional risk?• For intraday breakouts right on the Open 2-3 minutes

is sufficient• For intraday breakouts after the Open the minimum is

10 minutes• For swing trade breakouts look for a daily close

through the level

7. How should the stock behave when it breaks through the support/resistance level?There should be a surge in trading activity

8. How many times has the stock failed to break through the breakout level?If a stock has failed to breakout from a level after 3-4 attempts I become very skeptical

If I am skeptical I really want everything to line up just right to put on significant risk: aggressive buying, bids holding, good surge in volume

The flip side is if a S/R level has not broken many times and the stock has traded significant volume at the level traders would be trapped on a successful break

The NFLX Trade #1 Momo stock

Uptrend on every time frame

History of 10-20 point breakouts

Intermediate and full breakouts

In a “momo sector” 3D printing

Several recent failed intermediate breakouts

Large multi-month consolidation

The DDD Trade

Broken stock/Broken sector

Formed a recent base

Broken recent most recent downtrend 2 weeks ago

The WLT Trade

Questions?

3 FREE educational videos from the new SMB Mentoring Program that

begins in September

http://www.smbtraining.com/overview/dna-successful-trading