In contrast to more obscure patterns, breakouts can be easy to find. There are various online resources, and even traders with no programming experience or fancy scanning software can get evening breakout reports from sites like Top Breakout Stocks. (Great site, by the way.)
Like many traders, I got started trading breakouts after discovering William O’Neil and Investor’s Business Daily. It wasn’t long before I realized that trading breakouts was hit and miss. What O’Neil used to preach (not sure if he still does) about needing to cut losses at -8% and taking profits at +20% was very important because many breakouts fail. If your first 3 breakouts fail and you lose -8% each, your 4th breakout needs to be a successful trade with a gain of more than +25% in order to get back to break-even. In short, breakout trading tends to have low win rates (around 40% or so), and this makes trading them very difficult, in my opinion.
Breakout trading is complex enough that sites featuring breakouts seldom discuss sell signals, only entries. In fact, I don’t recall ever seeing a web site that publishes sell signals for open breakout trades. I’m not saying they don’t exist; they just aren’t very common.
Why is it that we don’t often hear about the exit strategy when trading breakouts? The answer is simple…
When trading breakouts, you will not be profitable without a robust exit strategy. The secret to trading breakouts is the exit…
I have dabbled with designing breakout systems over the years, and have always given up on them. I am currently dabbling again. Here are some setups for tomorrow. The entry setup has several requirements. A simple exit that will work for these is a 10 day time stop coupled with a 15% profit stop.
I will update the blog over the coming weeks and months as I work towards a robust breakout system.
Great idea. I will be following this!
Awesome! I love looking at breakouts. Trading them, not so much. I hope to change that.
Thanks, glad you like our site. In addition to reporting breakouts we show the average high, low, and close in the one month period following the breakouts. A reasonable exit strategy can be created using those numbers depending on your trading style.
RC one time suggested taking a look at the prior dip before the stock consolidated before the breakout. Jist of the idea was add the amount of “dip” to the breakout level to get a rough target for the exit.
Say a stock ran up to 50 then dipped to 40. Later it consolidates and builds some resistance around 45. If it breaks through 45, then a target would be 45 + (50 – 40) = 55.
When looking at potential breakout trades I sometimes use this to gauge which one has the highest potential for a bigger gain than the others.
I have tried something similar to that for C-W-H breakouts. It is not a bad exit.
Just my experience, but I tend to find the best opportunities happen in the days after the breakout occurs. I find my winning % along with my risk/reward profile just doesn’t support buying on the breakout. Like you, my initial foray into stocks was through breakout trading, but my typical experience was having to sit and wait through a number of volatile (and sometimes frustrating) red days. That’s when I decided to wait for those red days to get in, usually offering a much better risk profile (for me).
Interesting development here though…I’ll be following along.
Pistil, I like your idea, and have been kicking around a way to quantify what you’re seeing.