The Pros and Cons of Breakout Trading
We just had 2 big winners last week on ROOT and WGS using our top strategy for rapid account growth.
Both stocks were a little short in one of the key factors in the strategy but were very strong in other areas. These other areas were strong enough for us to give each trade the nod and both were big winners and led to a terrific week of trading.
Those using very aggressive position sizing, often used in trading contests, could have doubled their account in a week.
Both stocks soared 30% within a couple hours after reaching the breakout point and triggered the parabolic exit strategy taught in the new rapid account growth course. Even with small positions for each, we had a huge week while the overall market went lower.
But there are a lot of misconceptions about breakout trading taught elsewhere online and today I wanted to clear those up. This will be a very valuable article from a successful trader with over 15 years experience. So grab your favorite beverage and lets get started.
The Cons and Why Many Traders Give Up on Breakout Trading
Most successful traders that I know use a combination of fundamental and technical analysis when trading.
A lot of newer traders will either fall in love with a stock and ignore the chart. Or, perhaps just as bad, go solely with technical analysis when they are just not as experienced and knowledgeable.
This leads to many traders trading every breakout when they feel like it only to find that most breakout strategies fail to make much over time. If they make anything.
They might look at all the breakouts that form a generic bull flag strategy or perhaps a long enough consolidation and find that the win rate is not very good. They do not like the lower win rate and can get discouraged and give up on breakouts pretty quickly. Especially if they are trading reversion to the mean assets like commodities or forex which tend to have a lower win rate.
However, if you look at the best traders in history, you find many of them focus on breakouts. Many of these traders took around $10,000 or less and turned it into tens of millions of dollars in todays dollars.
What you find is that they just focus more on the best stocks near highs in the most bullish long-term trends and consolidation patterns ahead of the breakout. And avoid certain market conditions.
The Pros of Trading Breakouts
So the best traders ignore most breakouts and have a hyper focus on stocks with the best momentum, great technical and fundamental factors, and breakouts with little overhead resistance.
Last week is a good example of this. ROOT, for instance, was breaking out of a long flag pattern into new all-time highs. It also just had an amazing earnings report just before we notified our customers. The stock reached a good technical entry point the next morning and soared over 40% from there within a couple hours. It was a great 35% profit for those using our targets in the daily alert service.
Its real simple nowadays to put in a tight stop-loss and limit order for your target sell price. Because we are swing trading and not day trading, this trade could have easily been done from your smart phone.
Enormous Advantages of Trading the Best Breakout Patterns
When we first back-tested our top breakout strategy, one thing we noticed early on is that every single trade in the back-test lasted less than 2 weeks. The average time in the trade was about 3 trading days.
We also found an optimal exit strategy that beat the typical exit strategy using a bearish candlestick pattern or a close below a key moving average.
Using a bearish candlestick pattern on a daily chart to time the exit resulted in a MUCH longer trade. More than twice as long, in fact. Also, the win rate was MUCH lower as well.
The problem with this is that you could have your trading capital in another ideal trade during that extra 4 days. Also, the biggest portion of the move higher tends to happen early in the trade.
Also, using the Kelly criterion, a lower win rate forces you to use a lower position size to keep a very low risk of a very large drawdown.
More Ideal Breakout Trades per Week Equals Faster Account Growth
You could do 2 trades over the same timeframe with a higher profit per trade using our exit strategy optimized for todays market. In fact, you could just go for the first 7% profit target and have the average time in the trade cut in half again.
So its possible to have more than 2 full size trades per week and up to 150 trades per year with a high average profit per trade when including the top earnings breakout patterns also taught in the course.
Meanwhile, reversion to the mean swing trades tend to play out over a much longer timeframe, have a lower win rate in our experience, and have fewer big winners due to the overhead resistance.
You want to average 4% to 8% per trade over 3 days or less instead of that same average over 3 weeks to 3 months. The faster the profits occur, the better when trying to rapidly grow a small account swing trading during a market uptrend.
This is a huge advantage when trading ideal breakout patterns.
Only 20% to 25% of high tight flags will meet all our criteria in the rapid account growth strategy the morning just before the breakout. About 4 to 6 ideal breakouts occur per month during at least OK market conditions which is about 80% of the time historically.
Another Big Advantage – The Top Breakout Patterns can Prevent OverTrading
One of the biggest problems facing newer traders is overtrading. This is where a trader tries to trade everything they come across. Some traders will look at a chart and think they see a high tight flag, double bottom or some other bullish technical pattern with no rules on how to identify the best ones.
“It kind of looks like a cup with handle or bull flag so I will just give it a shot” is what many traders think when they size up a trade.
When you do the research to determine what set of factors lead to the highest win rate, you can actual have measurable yardsticks for what constitutes an ideal breakout trade candidate. You can sometimes get these factors down to levels where you can still have a much higher win rate over multiple market cycles while still having about 1 to 2 ideal trades per week.
After spending months of research, you may be able to find a set of measurable factors that lead to a much higher win rate. This normally leaves you with fewer trades per week.
This is much better because most long strategies will underperform near a market peak and when the market goes into a correction, pullback or bear market.
Most swing traders will have 10 to 15 positions on that are doing fairly well only to find nearly all of them going down at once going into a correction and while the market is in a correction.
Prevent OverTrading and You can Greatly Reduce Drawdowns
The ideal breakouts, if they meet the rules in the rapid account growth course, tend to still do well at least until you get into a correction (more than 10% off the 52-week highs on the major indices).
So you have a much higher win rate per trade, a larger average profit per trade, and do not have to scramble and babysit 10 trades going down early in a market downturn.
If you only have a couple ideal trades per week, with a high win rate and average profit even while going into a correction, with an average hold time of less than 3 days to reach your target, you go a long, long way in preventing damage to your account caused by overtrading.
In fact, most breakouts have a pretty low win rate with perhaps good upside potential. So it makes sense to focus much more on the ideal breakouts on the best stocks for breakouts for a much higher win rate while having fewer trades.
We find that we make much more with a lot fewer trades when focusing more on the top breakouts.
In our experience, 1 ideal trade makes as much as 10 2nd tier trades. In other words, 10% of your trades can make 90% of your profits. So focus on those trades with all the factors present that will likely yield a much higher win rate, can move a long way, and play out quickly.
This way you can also be back in cash quickly waiting for the next ideal trade. This way, you can compound your account quickly during market uptrends while still being in cash more of the time.
Its Tough to Lose When in Cash
The other benefit of our top strategy for rapid account growth is that we spend a lot more time safely in cash. Once the trade hits the profit target, we are back in cash waiting for the next ideal high tight flag breakout. Again, the average time in the trade is 1.5 to 3.5 days depending on whether you go for the quick profit or a home run trade.
It may be days or longer before the next ideal trade. Until then, we are safely in cash. If an ideal opportunity comes up that meets our rules, we then go into a trade that will likely play out very quickly so we can rapidly compound our gains outside of bear markets.
Trade all “good” looking breakout opportunities and the win rate is far worse in our experience and back-testing. As long as we have at least OK market conditions, we check all the important criteria in the top breakout strategy before entering a trade. If the trade does not meet all the rules or come close while being very strong in another area while meeting the other rules, we skip the lower win rate breakout trade altogether.
Once a bear market starts, very few of the ideal setups even come up. And we can focus on the best short setups or put option plays if we wish.
This swing trading approach saves a TON of time and gives you a lot of peace of mind once you see how well it works.
Save yourself years of trial and error by using our #1 strategy for hyper small account growth.
