June 28, 2006
You Can’t Just Buy Breakouts and Hope for the Best
Buying a high-volume breakout is easy — managing the trade is the hard part. In late April I featured the iShares MSCI Mexico fund (EWW) when it broke out. Now I’m going to explain in this series of charts how folks who took that trade and managed the risk aren’t stuck holding a loser. (These are all weekly charts.)
One of the “worst” stocks I featured this year was Parlux Fragrances (PARL). My stocktickr watchlist shows it down 70.99% from entry (ha!), but of course folks who manage their risk got stopped out long ago. I’m not sure if stocktickr has built-in a way to set stops (it probably does, I just don’t know about it), but my watchlist would look a lot shorter if it did.
(PARL is a long-time “favorite” of Herb Greenberg, who now has his own blog … it’s high time Herb, and welcome to the conversation!)
June 28th, 2006 at 12:20 pm
How about waiting for a ‘dummy’ entry *after* the breakout? Same difference?
June 28th, 2006 at 4:31 pm
Could you not see the consolidation as a sort of ‘inside bar’ or ‘narrow range bar’ on a higher timeframe?
June 28th, 2006 at 5:21 pm
Hi,
Actually these ‘failed’ patterns are potentially great trades for somebody.
Larry Williams calls the first (in particular) a ’specialist trap’ = reversal from a breakout in the direction of the trend within 3 bars after consolidation. And Linda Bradford-Raskhe and Connors call them ‘Fakeout-Shakeouts’… All the same meal though.
Cheers,
Andrew,
June 28th, 2006 at 9:09 pm
Babak: I suppose you could wait for a Dummy entry, but with these weekly charts that takes enormous patience.
opw: Do you mean does the weeks-long consolidation show up as an inside bar on the quarterly or half-year chart? Yes, it does, but no one I know “trades” off the quarterly charts.
June 28th, 2006 at 11:15 pm
PARL split 2 for 1
June 29th, 2006 at 4:41 am
Chairman: I just meant to say the principle does not seem that different to me: a 15 min ‘dummy trade’ might show as a consolidation on the 2 min chart. The weeks-long consolidation shows up as an inside bar on the half year…
BTW I really love the clean charts with your commenting, you used to do that more, I was starting to miss that :)
June 29th, 2006 at 6:40 am
snugs: Yes, I’m aware of the split and adjusted all the prices … the down 70.99% from entry is accurate.