False breakouts and stop loss placement

[pavilion103]

FALSE BREAKOUTS
I have just finished reading "The New Sell & Sell Short" by Alexander Elder. In this book he discusses that one of the most bullish signals is a false break to the downside accompanied by divergence (he uses the MACD and "Force Index"). Obviously the reverse is true for bearish signals.

He said that most amateurs will automatically enter on a break above resistance and below support only to see it reverse on a false breakout.

This has been one of the most difficult questions for me to answer as a beginner: when to buy on the initial breakout and when to wait for confirmation of a break. Obviously things like volume and divergence can help but I'm still very much trying to get a "feel" for this.


Stop Loss Placement
Alexander Elder also discussed the placement of a stop loss around these market lows/highs. He says that amateurs place a stop 1 tick below the recent low. He said that there are very predictably many stops there and:
1. Slippage is an issue
2. There are very often false breakouts before price reverses again

So he says 1 tick below the low is not something professionals do.


I don't have any particular question in this post but it would be good to open up a discussion on these points to see if they align with the views of Alexander Elder.

 

[Gringotts Bank]

Upwards breakouts work when:

1. there's volume to support the move.
2. The breakout occurs without too much waiting. If the SP has to creep up onto the neckline/resistance, there's hesitancy and it will fail or be delayed. If it's a triangle type pattern, the break should occur 2/3 the way into the formation for best performance, not near it's end.
3. the Ords is bullish.

eg. IRN I bought yesterday because of the absolutely perfect formation the inverse H&S. It also matches what the Ords is doing in terms of it's pattern, which is bullish. The break hasn't happened today. Not enough volume. Needs about 3 million shares traded to breakout convincingly. I can take a loss now or bank on a delayed breakout late today or tomorrow. Most of the boxes are ticked. Ords gaining strength now.

 

[MrMomentum]

When it comes to upward breakouts I look for momentum.

Once an upward breakout occurs, I like to monitor the candles to see if they continue to make higher highs and higher lows.

If this does not happen I would be looking for any other signs to validate if the breakout is false.

 

[motorway]

A successful breakout needs signs of "resilience" in the price and "absorption" of volume
In the action preceding the breakout ...

Or it needs significant volume (= eg new participation driven by real news )
with no slippage in price

imo

As most news is not news
the first criteria are usually the most relevant ( IE was there Accumulation ! )
such a breakout does not need Volume.

Though volume will come in as new participation follows along..

motorway

 

[tech/a]

The key is to spot a false breakout.
You see them all the time in futs.

Motorway has touched on some excellent points and I agree often volume and range in the direction of the breakout will often get you on the wrong side.

When I get some time I'll post up some charts explaining the way to identify these.

Het M/W good to see you back--- I'm still on v/d 5000 iu

 

[barney]

FALSE BREAKOUTS
I have just finished reading "The New Sell & Sell Short" by Alexander Elder. In this book he discusses that one of the most bullish signals is a false break to the downside accompanied by divergence (he uses the MACD and "Force Index"). Obviously the reverse is true for bearish signals.

He said that most amateurs will automatically enter on a break above resistance and below support only to see it reverse on a false breakout.

This has been one of the most difficult questions for me to answer as a beginner: when to buy on the initial breakout and when to wait for confirmation of a break. Obviously things like volume and divergence can help but I'm still very much trying to get a "feel" for this.


Stop Loss Placement
Alexander Elder also discussed the placement of a stop loss around these market lows/highs. He says that amateurs place a stop 1 tick below the recent low. He said that there are very predictably many stops there and:
1. Slippage is an issue
2. There are very often false breakouts before price reverses again

So he says 1 tick below the low is not something professionals do.


I don't have any particular question in this post but it would be good to open up a discussion on these points to see if they align with the views of Alexander Elder.

Hi Pav,
Is Elder referring to Stocks in his commentary?? What he is saying seems more in tune with trading Forex and Futures.
Cheers.

 

[tech/a]

Barney I think the observations are true in all instruments.
Certainly pros keep away from swing high and lows for stops in futs.
But there are times when you can be pretty sure its as safe as houses.

I'm going to post up a chart and after people have had enough time to comment Ill post the next which is a follow on from the first then the next and the next all the same chart but at different stages.
Then Ill post my comments to each chart.
Will be interesting to see if people see .

The question for the chartist is is this a true or false break.
Through analysis present evidence to support your view.

I have included stochastic and volume only.

 

[Chalea]

The question for the chartist is is this a true or false break.
Through analysis present evidence to support your view.

 

[skc]

Barney I think the observations are true in all instruments.
Certainly pros keep away from swing high and lows for stops in futs.
But there are times when you can be pretty sure its as safe as houses.

I'm going to post up a chart and after people have had enough time to comment Ill post the next which is a follow on from the first then the next and the next all the same chart but at different stages.
Then Ill post my comments to each chart.
Will be interesting to see if people see .

The question for the chartist is is this a true or false break.
Through analysis present evidence to support your view.

I have included stochastic and volume only.

View attachment 44299

Clearly it's a false break because if it was a real break with next candles going lower, the area of the chart where the candles are currently shown would be much higher relative to the y-axis.

 

[tech/a]

Clearly it's a false break because if it was a real break with next candles going lower, the area of the chart where the candles are currently shown would be much higher relative to the y-axis.

Don't see any candles?

The chart is dynamic .

Any other things you see to support a false breakout?

 

[notting]

I haven't got a clue but I'm going to try and learn something.
I'd say true because its not showing over sold stochastic, supported by high volume, finished on it's lo!w below support.
But I wouldn't trade it on that evidence alone.
Concerned about the high volumes on the preceding lifts.
Feels like a trick question.

PS I admire Chalea's willingness to have a crack!

PPS I have no idea what Chickie just meant!

 

[tech/a]

PS I admire Chalea's willingness to have a crack!


Who?

 

[Chalea]

PS I admire Chalea's willingness to have a crack!

Who?

LOL, bet I'm right!

 

[barney]

Barney I think the observations are true in all instruments.
Certainly pros keep away from swing high and lows for stops in futs.
But there are times when you can be pretty sure its as safe as houses.

Howdy Tech,

No doubt the "push it past" support/and/or resistance, then reverse it, happens all the time in FX and Futs, but I think Stocks run a long last in the implementation of that strategy ..... thinly traded Specs are obviously more prone to it than Blue Chips due to their illiquid nature, which is paradoxical compared to FX where the amount of contracts changing hands is huge ......... as we know, the big players need large volume to create opportunity, and Stocks don't generally give that consistency.

Interestingly enough, I see the above as an advantage for us retail traders if used in the right fashion ...... ie. Position sizing is critical in FX if you want to keep your shirt .....

If Elder was referring to Stocks behaving in the same way that FX and Futs do, I'd be a bit surprised, unless he was talking on longer relative time frames (for Stocks)

Its an interesting topic, and well worth the time invested to gain a sustainable edge. (Still a work in progress for me, but getting some positive results)

Cheers.

 

[skc]

Don't see any candles?

The chart is dynamic .

Any other things you see to support a false breakout?

I thought you manually cut off the right-hand side of the chart to hide the next few bars, and I assumed that you didn't shift the bars vertically. So the lack of white space under the chart you posted indicates to me that there are no lower bars to the right.

It was just a joke really.

The only other thing supporting a false breakout is the purple line you've left in the chart which may suggest past support further to the left.

This is also a joke.

 

[barney]

View attachment 44299

Out of curiousity Tech ...

Is the Chart a Stock/FX or Futs chart?

Are the bars Daily/Hourly/ Minute etc?

How does the Volume of the first high volume bar (a few bars in from the start of the chart) ... Compare to the highest volume bar of the previous day, and the day before that?

ie. More information thank you

 

[tech/a]

Out of curiousity Tech ...

Is the Chart a Stock/FX or Futs chart?

Are the bars Daily/Hourly/ Minute etc?

How does the Volume of the first high volume bar (a few bars in from the start of the chart) ... Compare to the highest volume bar of the previous day, and the day before that?

ie. More information thank you

Futs
Yeh yeh more info coming
Charts are all follow on of he same chart.
One more in a mo
Then I'm off to bed 5.30 start

 

[tech/a]

Here is another to help with the analysis.----next bar actually and a little more white space below to help SKC

 

[Lone Wolf]

The chart looks more like being in a range to me, so I probably wouldn't normally try to analyze it. But I'd like to learn how so here goes:

Six bars prior to the break (red bar) - Sellers move price lower but buyers bring it right back up on the following bar. Price drifts down. Buyers step up and move prices higher but are met with sellers closing the bar near its low. The following bar is very low volume closing on the low indicating no further interest in trying to push prices higher. Looks good for a drop. However... Looking back further - the move down touching the first black line was on very high volume but had no follow through. Sellers are there but only want to sell at a good price, buyers happy to wait for a better price. Still seems like a range to me.

The breakout bar itself closed on its low which is a good sign for a breakout, but I expect some of that high volume is from buyers coming in to pick up a bargain at the bottom of the range. If I wasn't already short I wouldn't get on now.
___________

I was a bit slow posting - now I can see the next bar. Doesn't change much for me.

 

[AlterEgo]

when to buy on the initial breakout and when to wait for confirmation of a break.

Just from my own observation, the best and most profitable trades were the ones that went very strongly in my favour straight away and never looked back, never giving me a second chance to enter. So if you missed the breakout or delayed and waited for conformation you'd have missed the trade.