More About Breakouts

Two guiding principles of Alphatrends are to ask these questions before we enter any new trade

– Where has the stock come from?
– Where does the stock have the potential to go?

Everyday these questions (along with other helpful reminders) are on our swing sheet with the trading ideas. They are there to make sure we don’t listen to conventional wisdom and instead, listen to the only thing that matters.. Price action!

Last week we bought shares of Maxliner ($MXL) as it broke above short term resistance at 2160 (point 1). As per our risk management, we sold 1/3 of the stock for a quick gain of $0.20/share as it went through daily R2. Our goal was not to make a profit as much as it was to reduce or risk so if the stock reversed and stopped us out we would minimize the impact of a stop on our overall position.

We raised our stop that day to 2175 (point 2) and because it didn’t get hit we held our 2/3 position until today. Today, our plan was to sell another 1/3 position above 2150 (point 3) because it would be breaking to a new all-time high (which often traps late buyers.) At the same time that we took an additional $0.92 profit, we raised the stop on the balance to 2190 (point 4) which was hit about an hour later, these shares were stopped with a profit of $0.29.

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Here is why the Alphatrends approach is better than the traditional “buy the breakout” approach, still espoused by people who have not updated their trading techniques.

1- Our approach was anticipatory

2- We immediately sold some to cover commissions and reduce risk of losing our principal

3- We set a stop in a logical place based on price action

4- We didn’t get excited and chase the new highs, instead we sold some to the latecomers

5- We locked in the balance of our shares with a profit.

How would you have felt if you bought “the breakout?”

See other recent examples HERE and HERE