| | | | Short Term Trading Tactics - Avoid False Breakouts
The Breakout Is One Of The Most Popular Short Term Trading Tactics In The World
One of the most popular short term trading tactics is trading breakout strategies. Most traders love breakouts because they are simple to find and easy to trade. There is very little in the way of theory and typically breakouts are accompanied by volatility so things happen quickly. Also, many times breakouts are caused by news or other important fundamental announcement that can cause serious momentum in the direction of the breakouts.
The Breakout Method Has The Lowest Profit Ratio Of Any Short Term Trading Tactics
The biggest problem most traders experience with breakouts is the percentage of trades that end up being losers. Unfortunately, the breakout is known for being the strategy that causes traders the most amount of grief. Like most things in trading it's a double edge sward, the best short term trading tactics usually have the highest number of losers compared to winners.
Imagine for a minute that you can keep all the benefits to trading breakouts but could eliminate the high percentage of losers, wouldn't that be great?
Well I'm going to show you some data that I've collected that will help you do just that, it will help you avoid false breakouts and substantially increase your percentage of winners to losers ratio.
What I did was test about 60 different markets and about 2,500 stocks over the last 30 years, to see which length of breakout causes the least false signals. You would think that this type of analysis would be all over the internet, but it's not.
Setting Up The Indicators For Breakout Test
The test was very simple, I used a simple moving average with the length of 20 days, 40 days, 60 days, 80 days and 100 days.
I wanted to see what percentage of trades that rallied above the moving average actually stayed above the moving average. I used a simple volatility stop loss level as well as profit target so that the tests were identical across the board. I used an ATR (Average True Range indicator for the volatility levels, I will do another tutorial later this week on using the ATR indicator for stops and profit targets.)
The Results Are In
You may be very surprised at the results, but here they are and they are based on over 30 years of back data history, using commodities, stock index futures, currencies and stocks, almost 2500 hundred stocks were used. Stocks were priced over $30.00 and had an average range above 1.00 per day. I wanted to find volatile stocks so if you try to replicate this test, you may want to consider doing the same.
- Results for 20 days Simple Moving Average - 29.7 percent profitable
- Results for 40 days Simple Moving Average - 35.9 percent profitable
- Results for 60 days Simple Moving Average - 44.3 percent profitable
- Results for 80 days Simple Moving Average - 51.7 percent profitable
- Results for 100 days Simple Moving Average 47.9 percent profitable
I was actually very surprised when I saw these numbers, I was expecting the highest percentage of profitable trades to be near the 50-60 day level, but these numbers DO NOT LIE. They are based on statistics, and if you want to create profitable short term trading tactics, you may want to read what I'm about to write. The highest percentile of winning trades peaked at 90 days.
This means that if you want to trade breakouts, you may want to consider using the 90 day simple moving average, because according to statistics it produces an accuracy rate of about 55.9 percent. I was hoping that the longer time frame would help increase profitability even further, but after 90 days the number started going down quickly. You can see that waiting to 100 days only decreases the percentage of profitability.
How Can This Information Help You?
If you are creating short term trading tactics that involve breakouts, this study should be your best friend, you now know the best time frame to trade breakouts that will cause the least amount of false signals, but even more importantly this study provides something even more important for savvy traders.
Look at the percentage of false breakouts that occur when you are trading 20 day breakouts, the number is 29.7 percent, let's round that up to 30 percent. What this means that on average 7 out of 10 trades involving 20 day breakouts will go against you.
This is incredible news! No not the fact that you have huge amount of losers to winners. Just the opposite, you can now create a trend reversal strategy that uses false breakouts and you can achieve 7 out of 10 winners instead of losers. Remember, strategies that have a large number of losers compared to winners can be reversed to achieve a high amount of winners to losers!
So the next few days I will show you how to use this information to create a profitable trend reversal strategy. You don't want to miss this so stay tuned for tomorrow's tutorial.
If one of your short term trading tactics is breakouts, you may want to consider increasing your breakout time frame to 90 days, this is statistically the best moving average length to avoid false signals almost 40 percent of the time or increase your profitable trades close to 60 percent ratio, and if you trade breakouts you know how huge that is.
Don't miss the next several tutorials if you want to learn to make your own short term trading tactics that work! |
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| | | | | | | From the WealthPress Mailbag
Sammy P. writes…
"Best wishes go out to everyone. It's been a little over 2 years since I first began watching your videos and reading your articles and I have nothing but the best things to say. The swing trade group is great and I can't wait for the daily updates and the setups each day. No one out there backs things up with data like Roger does and that makes more confident in my trading."
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| | | Market Action
U.S. markets pulled back on Friday despite solid earnings from the Financial sector. The solid numbers were attributed to rising interest rates and the effects of tax reform, but strong earnings were widely expected with the sector turning lower soon after the open. The market kept its losses to a minimum although the final hour of trading brought session lows with a slight bounce into the close. The major indexes still managed gains for the week and ahead of the first full week of 1Q earnings season.
The S&P 500 slipped 0.3% after tapping a low of 2,645 but has been holding the 2,600 level for nine-straight sessions. The Dow fell 0.5% following the backtest to 24,243 while holding the 24,000 level for the past four sessions.
For the week, the S&P 500 was up 2% while the Dow gained 1.8%. Both indexes failed their 50-day moving averages on the open with the 100-day moving averages closing below the former for the week. We mentioned the mini-death crosses would be a slightly bearish development and something to watch this week.
The Nasdaq gave back 0.5% after trading to an intraday low of 7,078 but has been holding the 7,000 level for four-straight sessions. The Russell 2000 was lower by 0.5% following the late day bottom to 1,545 and has been holding crucial support at the 1,500 level for nine-straight sessions.
The Russell 2000 rallied 3% for the week while the Nasdaq jumped 2.8%. The Nasdaq closed slightly below its 100-day moving average while the Russell 2000 held this key technical level of support on Friday's pullback.
Energy and Utilities were the sector standouts after rising 1.1% and 0.8%, respectively. Financials fluttered 1.5% to pace sector weakness while Consumer Discretionary was off 0.6%.
For the week, Energy surged 3% while Technology jumped 1.3% and Materials were up 0.4%. Utilities sank 2.8% while Real Estate was down 2.6% to pace sector laggards.
Earnings
First-quarter earnings heats up this week with Q1 earnings for the S&P 500 index expected to be up by 16% from the same period last year on 7.4% higher revenues. This would represent the highest quarterly earnings growth rate in seven years.
Earnings growth is expected to be in double-digit territory from the year-earlier level for the Technology and Finance sectors. Energy sector earnings are expected to be up just north of 60% from the same period last year on 16.1% higher revenues. Excluding the Energy sector, total S&P 500 earnings growth drops from 16.1% to 14.6%. Friday's results from the Finance sector were very strong and should continue in the coming quarters.
In percentage terms, estimates have gone up the most for the Basic Materials, Energy, and the Industrials sectors. In absolute terms, positive revisions to the Finance and Technology sectors account for more than half of all estimate upgrades since the quarter got underway.
For the S&P 600 index, Q1 earnings are expected to be up 13.4% from the same period last year on 6.9% higher revenues. This would follow 15.2% earnings growth on 7.6% revenue growth in the preceding quarter.
For full-year 2018, earnings for the S&P 500 index are forecasted to be up 17.9% on 5.3% higher revenues, with full-year 2019 earnings and revenues for the index expected to be up 9.4% and 4.3%, respectively.
The implied EPS (earnings per share) for the index, calculated using a 2018 P/E of 17.3 times is $153.80. The index EPS equates to $168.30 for 2019 on a forecasted P/E of 15.7 times. The multiples for 2018 and 2019 were calculated using the index's total market cap and aggregate bottom-up earnings for each year.
Global Economy
European markets traded higher for a second-straight session, although the gains were limited, to extend their weekly win streak to three-straight. Germany's DAX 30 rose 0.2%. UK's FTSE 100, the Stoxx 600 Europe, France's CAC 40 and the Belgium20 were up 0.1%
The eurozone trade surplus widened in February, with imports falling 3.1%. Exports also declined by 2.3%, leaving the EU with a 21 billion euro surplus, or $25.9 billion, up from 20.2 billion euro in January.
Asian markets were mixed with China's Shanghai falling 0.7% while
Hong Kong's Hang Seng slipped 0.1%. Japan's Nikkei gained 0.6% and South Korea's Kospi advanced 0.5%. Australia's S&P/ASX 200 climbed 0.2%.
China's trade balance swung to a deficit of $4.98 billion in March from a $33.7 billion surplus in the previous month. Expectations were for a surplus of $19.6 billion.
Chinese banks issued 1.12 trillion yuan, or $178 billion, of new yuan loans in March, up from 839.3 billion yuan in February, but below forecasts for a print of 1.2 trillion billion yuan. Total social financing, came in at 1.33 trillion yuan in March, up from 1.17 trillion yuan in February.
U.S. Economy
Preliminary April Consumer Sentiment dropped 3.6 points to 97.8.
The JOLTS report showed job openings declined 176,000 to 6,052,000 in February.
Baker-Hughes Rig Count reported that the U.S. rig count was up 5 rigs from last week to 1,008, with oil rigs up 7 to 815, gas rigs down 2 to 192, and miscellaneous rigs unchanged at 1. The U.S. Rig Count is up 161 rigs from last year's count of 847, with oil rigs up 132, gas rigs up 30, and miscellaneous rigs down 1 to 1. The U.S. Offshore Rig Count was up 4 rigs to 16 and down 5 rigs from last year's count of 21. |
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Market Sentiment
St. Louis Fed James Bullard wants the FOMC statement updated to indicate the Fed is already at or near a neutral rate. He also spent time reflecting on trade developments, warning that the worst outcome would be implementation of tariffs with no prospect of removal . However, he hopes negotiations will prove constructive and avoid that negative outcome.
Bullard thinks that recent inflation data has been unsurprising, only just reviving to 2016 levels, while global growth has surprised to the upside and weakened the dollar. He also supports reviewing the inflation framework every 5-years or so.
Bullard went to add he doesn't think that if Q1 GDP comes in lower than expected that it will affect the Fed's medium-term outlook and doesn't believe any major change in the jobless rate will take place by year-end.
The iShares 20+ Year Treasury Bond ETF (TLT) traded higher for much of the session while peaking at $121.13. Lowered resistance at $121-$121.50 was cleared but failed to hold into the close. Support remains at $120.50-$120.
A trading range between $122-$120 has been holding since late March with a close below $119.50-$119 being a bearish development. A move above $122-$122.50 and the 200-day moving average would be a bullish signal.
RSI is trying to clear resistance at 55 with potential for a run towards 60-65 and late March and December highs. Near-term support is at 50 with risk to 40 on a more below this level.
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Volatility Index
The S&P 500 Volatility Index ($VIX) traded in negative territory throughout Friday's action after falling for a fourth-straight session and testing a low of 17.26. We mentioned a breach below support ahead of the weekend at 17.50-17 would be a very bullish development with a move below the latter getting 16.50-15 in play. Lowered resistance is at 19.50-20 with a close above 20.50-21 and the 50-day moving average signaling a possible market top.
RSI remains in a downtrend with support at 40. This level has been holding since May of 2017 with continued closes below this area signaling a possible market breakout and a return to fresh all-time index highs. Resistance is at 50.
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Market Analysis
The Spider Small-Cap 600 ETF (SLY) bottomed at $135.26 with prior support at $135.25-$134.75 holding. A close below the latter could lead to a continued pullback towards $134-$133.50 and the 50-day moving average. Lowered resistance is at $136-$136.50 with continued closes above $137 signaling a possible run towards $139-$140 and a return to all-time highs. The 50-day moving average has flattened out from a recent downtrend with RSI holding support at 50 on Friday's weakness. A close below this level would be a bearish development with risk to 40. Resistance is at 60 and the mid-March peak. |
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Sector
The iShares PHLX Semiconductor ETF (SOXX) tested a low of $179.58 while closing back below its 50-day moving average to snap a four-session winning streak. Near-term support at $180-$179.50 held with risk to $177.50 on a close below the latter. Lowered resistance is at $182-$182.50 with continued closes above $184 and Friday's high signaling returned momentum. RSI failed to hold 50 with continued closes below this level likely leading to a retest to the 40 area and recent lows. Continued closes back above 50 could lead to a run at 60 and mid-March |
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The percentage of S&P 500 stocks trading above the 50-day moving closed Friday at 38.69% down from an opening of high of 43.84%. Shaky support is at 35%-34% with a close below the 30% level being a bearish signal for the index. Resistance is at 40%-45% with continued closes above the latter leading to a possible push towards the 50% level and the mid-March peak.
The percentage of Nasdaq 100 stocks trading above the 200-day moving average is currently at 56.31% with Friday's high reaching 61.16%. Support is at 50% and early April support with a close below this level being a bearish development. Resistance remains at 60% with continued closes back above this level being slightly bullish. |
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All The Best,
Roger Scott
WealthPress |
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