Swing Trading Breakouts

Breakouts are frustrating to swing trade.

Not because they don’t pay, it’s because of the win loss ratio. You need an iron stomach to deal with the whip-saw trades until one follows-through.

Some of the oldest trading systems are breakouts. The beauty of the trade lies in its simplicity. You can apply it to any time frame and the parameters are clear cut.

The challenging part, the part that drives you to doubt them, is when the breakout is bordering on a false signal. The trade management can be frustrating.

Luckily there are ways to stack the odds so that you only execute on the better quality breakouts.

Breakout Trade Scenarios

There are limitless ways to trigger a breakout signal but for swing traders we should focus on the daily, weekly and monthly charts. Aggressive educators may tell you to drop down to the 60 minute chart for an early entry, but for most traders that would mean watching intraday charts and that misses the point of swing trading. You want to avoid day trading entries, this can only lead to over trading.

Perhaps the cleanest and easiest breakout trade is penetrating yesterday’s high or low. The great characteristic about this significant reference point is clarity of recognition. Most traders will set a buy-stop or sell-short stop to enter a new position in the direction of the longer-term trend.

If you have a solid trading plan your stop-loss will trigger when your entry is filled. You always want to be proactive and program the second part of the trade in case you get filled on your entry abut can’t get to a computer or call your broker.

Always protect the down side. Not doing this cost me almost $3,000 on the Greek bailout a few years ago. It was a very expensive coffee break. I was comfortably in the money on multiple positions but the news caused a spike. Never leave open positions unattended.

Two “old-school” breakout signals are the 20 day breakout and the 55 day. The signals go back to Richard Donchian prior to computers generating signals. If you know your trading history this was also the signal of the billion dollar experiment known as the “Turtles” back in the 1980’s with Richard Dennis and William Eckhardt.

They made a fortune with this simple system. The challenge of the trade management was the drawdowns. The exit signals were against the trend, never into momentum. This meant significant paper profits evaporated holding the trade according to the rules.

The trade was never designed for a high win-loss percentage. It was for big winners. Many traders quit the program because they couldn’t handle watching money disappear.

Breakout Entries

There are three primary entry considerations.

  1. Price Crossing the breakout level.
  2. Price Closing above the breakout level.
  3. Price breaking out and pausing past the breakout level.

Each trigger is has its own characteristic but safe to say #3 is the most conservative.

To improve your odds for follow-through make sure the underlying trend is obvious and the general market is in sync with your scenario. If not, take trade #3.

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