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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