Buy the Breakout? I Don’t Think So!

March 22nd, 2013
in contributors, syndication

Online Trading Academy Article of the Week

by Sam Seiden, Online Trading Academy

Recently, the news has been covering the fact that the Dow Jones Industrial Average and many individual stocks have been making all-time highs. If you have ever read a book on trading or technical analysis, you will know that the breakout trade is extremely popular. Most retail traders are told to look for breakout opportunities as a chance to buy and profit from new highs in the stock.

If this strategy worked so well then anyone who has read those books should be billionaires!  The problem is that the majority of retail traders or even academics do not make consistent profits in trading.  So we need to examine our strategies and figure out who is making the money in the markets and mimic their strategies.  So who makes the consistent profits in the markets?  The institutional traders do!

Follow up:

As Online Trading Academy, we teach you how to trade like the professional institutional traders.  When we trade, we need to find the areas where the amateurs are making mistakes and take the opposite side of the trade from them.  That is what the professionals do on a daily basis.

It always amazes me when I look at peoples’ actions in the markets.  In our everyday lives, we look to buy things cheaply or on sale.  Think about a car buying experience.  You wouldn’t walk onto a car lot and take the first price offered to you.  Or even worse, you wouldn’t wait for the price of the car to go up before you bought it would you?  Of course not, you haggle with the sales person to get a lower price and a value for your money.

But when it comes to buying stocks, amateurs often look to buy once prices have risen or when they breakout to new highs!  Often they buy a peak and lose as prices fail to reach those new highs they had anticipated.

Click to enlarge

Notice how the volume spikes just after the breakout of the new highs on SPY.  This is caused from the amateurs jumping on the ETF according to their breakout strategy.  This sudden influx of buying pressure dies off quickly without institutional support.  The amateurs are left holding the bag as price drops fast and either stops them out or increases their pain.

Click to enlarge

Notice how the volume dropped sharply after the breakout as the short term demand died off after the amateurs bought the breakout.  Without more buying pressure and demand increasing, you are likely to see a failure of the breakout.

Trading the professional way really involves common sense.  We should buy stock on sale and sell it when it becomes expensive, not the other way around.  To learn more about how to trade like a professional, attend one of Online Trading Academy’s Market Timing Courses and see how the professionals consistently profit in the markets.


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