My Strategy (for Critique Please)

My aim is to buy a stock when it shows the FIRST signs of a breakout with potential emotional force behind it.

My rules for buying are set out below. I have purposely left out the numbers.



A chart pattern that has formed a base for the previous least six months. It is OK if it has started a gentle uptrend. It is OK that the stock was in a dwontrend prior to forming the base. It is not acceptable if the stock has risen prior to the base. (I use my "sight" to determine if the chart is OK).

The closing price is at the high for the day or within **% of it's high. (My indication of strength.)

A ****fold increase in volume over the average of the previous five days.

A gain of better than **% from the previous days close. (look north of 20% for an indication of my figure, any less and you are wasting your time).

Turnover of at least $**,*** on the day. (Eliminates the transaction / s of a couple of thousand dollars. The method is to highlight a breakout that has force behind it).




JRV for instance did not qualify, but stocks including ADY and OEX did. Most are sold within a couple of days, the odd one kept.

Rip it apart folks! Please.

I know a few traders with similar entry plans and it's working well for them. But you left off the important bit! The exit conditions!

Do you use targets, trailing stop, momentum failure?

Cheers

Dribbles.

As Wayne points out there is no way you can evaluate a method without all its components.

I trade breakout methods myself. The numbers on the analysis arent the important issue when it comes to profitability.

From an entry point of veiw the most common are
Breakouts
Pullbacks
Fundamentals.
Moving average crossovers

Ofcourse there are infinite types of entries,exits and stops.

It isnt possible to know if the method you design will be profitable unless you can calculate.

Risk Reward Ratio.
Consecutive losses.
Ratio of wins to losses.
Initial Drawdown.
Parcel sizes
Number of stocks in your portfolio.
Finally Positive Expectancy.

You need to choose your stocks to trade known as your universe of stocks eg the ASX 200 I trade the BT Margin list.

Are you going to use a stop if so what is it?
The exit is ?
Now if you want me to test the method on my software Im happy to code it and send you the results

rwi@chariot.com.au

tech

Thanks for the responses.

WayneL

I struggle with exit conditions. I have three classes of investments roughly categorised as:
(A) Huge momentum (large rise, huge volume, close at high etc).
(B) Strong momentum (good rise, good volume etc).
(C) Those that are lightly traded.
I have missed some good rises by cutting out too early. My method usually produces stocks that do not fall back to where they were prior to the breakout. I try to give each stock a couple of days provided the momentum is still at a level that will keep the stock buoyant. I know this is scratchy but as I said I struggle in this area. I am comfortable with taking a 10% loss and accept that (C) may be even worse if I have to get out. But (C) provides some great results.

The timing of my buy is critical to the success of this method.

tech/a

I only use breakouts.

Having read your posts on this board I am in the process of assembling data to get a clearer picture of expected results.

Central to my selection method is judgement as to whether the chart can support a breakout. (How do I measure judgement?????) For example if a stock has been trending down for six months (say 30% drop) then develops a base for at least six months, I read into the chart that impatient investors have sold out of the stock and it has reached a level where there is support. This is one chart pattern I use, the others are similar, mainly centred around the formation of a base.

I only look at mining and oil & gas stocks because I believe that these offer the best chance of not falling the very next day to levels prior to the breakout. Biotechs need flushing down the toilet!!!!!!!!!!!!

I have a watchlist of stocks in these sectors based on my preferred charts.

I have no stocks in my portfolio at the moment but that could change today.


I have a successful selection method but know I could ruin it without addressing the issues raised by WayneL and tech/a, especially the exits.

To tech/a. How can you test data when selecting a stock through looking at a chart is central to this method?

More when I have assembled the data.

Had a look at the thread "Trading Stocks under 20c" and found a couple of comments that agree with my method.

Tech/a comments

At around now 10am I search for highest % gainers at heavy volume.
Highest gainers and heavy volume fit my method perfectly!
Id take only 1 or 2 trades if they were stand out and trade them intraday.
Ie Hold till close if it closed on its high Id log for sale at open tommorow.
Closed on its high is an indication of strength and almost my number one rule.
If it was closing 25% or more off the high Id sell at close.
Interesting, my research agrees with this 100%.

Just scanned and CUE at 21c would have been a candidate.Lets watch.

Anyway you may well be right but Ill keep banging the brain and see what developes.

tech
If it traded 2 ticks below entry then Im out.Did OK.




Aussie Jeff

With my very limited experience in trading these "little monsters" (ABI, MXL, INT, EPT to name but a few), I honestly feel that the fortunes of these stocks are almost entirely in the hands of momentary market perceptions, whims, flights of fancy, rich rampers & dumpers out for a 'bit of fun' and even occasionally - just occasionally - a response to a fair dinkum, positive, no BS company news result!
The basis of my trading is to jump on the bandwagon and ride the wave of emotion. There are strategies to sort the wheat from the chaff. Not all stocks that have a huge rise are subjest to flights of fancy and so on ...... I love stocks that close at their high or within one tick, that confirms to me fair dinkum strength. Provided my other rules are satisfied, I'm in!

Very interesting threads here. Thanks.

To tech/a. How can you test data when selecting a stock through looking at a chart is central to this method?

You cant unless you can code what it is that your looking for and place that in with all the other criteria.

tech