Article:
Breakouts
(Dec
20, 1999)
I recently
received a letter from an editor from another futures magazine.
She asked me about trading breakouts. What are the disadvantages
and advantages? What do I use as breakouts from.
For breakouts,
I simply use the previous tops and bottoms. The more important
the top or bottom, the more important I view the breakout. For
example, I think it is more important to break out of the top
on the weekly chart than on the daily chart. Breaking both is
even better.
In addition,
I prefer to see a breakout over multiple tops than a single top.
For example, I find it far more significant if the market breaks
through a point where the market has stalled out several times
at generally the same price.
I see two
significant advantages for using breakouts:
1. You have,
by definition, put yourself in the direction of the trend. Never
never forget that the trend is your friend.
2. You nearly
always start the trade with profits. The momentum required to
create the breakout should immediately carry through and create
a profit.
I see really
only one disadvantage and that is that stops tend to be wider
than some other methods.
The bottom
line is that I have used breakouts for years and I make my living
as a professional money manager.
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