3 Reasons Why Trading Breakouts is a Losers Game 3

BREAKOUT!

The word “breakout” sounds so exciting doesn’t it? It sure sounded exciting to me when I first started trading. But then I realized that it is much easier (and smarter) to buy pullbacks.

First of all, “What is a breakout?”.

A breakout is defined as a stock price that moves outside of a support or resistance area. You would then buy (or short) the stock once it moves above or below these areas.

But, it is not that easy.

There are three problems with trading breakouts:

1. Failed Breakouts

2. Consolidations

3. Pullbacks

Let’s break these down (no pun intended!) and I think that you will agree with me that trading breakouts is much easier said than done.

Failed Breakouts

How many times have you seen a stock move up through a resistance area, only to sell off? I’ve seen it happen countless times. This is probably the most frustrating thing about buying breakouts.

Here is an example:

Failed Breakout on a Stock Chart

The arrows show a couple of whipsaws. Finally, this stock did breakout, but then it tanked a few days later. Talk about frustrating!

Consolidations

Many times a stock will indeed breakout but then consolidate for a very long time. This ties up your trading capital in a stock that is going nowhere. And, it requires a level of patience that most people simply don’t have (including me).

Here is an example:

Consolidation After a Breakout

Buying the breakouts here would have you waiting for weeks in a stock that isn’t going anywhere.

Pullbacks

Many times a stock will breakout and pull right back to the breakout point. So (if you bought the breakout) you are now stuck in a bad predicament…

1. You don’t want to risk taking a loss so you are forced to sell.

2. But, you are selling into weakness when the stock has a high probability of moving in your desired direction!

Take a look at the following chart:

Pullback After a Breakout

This stock broke out (arrow) and then pulled back right back to where it broke out (circle). That is a bad situation to be in if you bought the breakout. But, it would be a great situation if you bought the pullback.

These are the primary reasons why I think trading breakouts is a losers game. But, I would love to hear about your experience with trading breakouts.

Do you trade breakouts? If so, have you had much success trading them?

Leave a comment below!

3 thoughts on “3 Reasons Why Trading Breakouts is a Losers Game

  1. Phil Jul 6, 2010 4:59 pm

    I only trade breakouts if the overall market is supportive. I want to see a high number of 20 day or even better 52 week highs and a well trending market. Right now, trading breakouts to the upside is a complete waste of time in my opinion.

  2. Zoltan Jul 7, 2010 1:55 am

    Trading daily pullbacks with 3-4 hour breakouts to the direction of the daily trend.
    IMHO the breakout point on IDT chart was at around 9.20, because it was a breakout from a wedge. Taking profits around 11 should be a good idea, candles clearly tell the story. What is about april 20 breakout in this chart? That could have been a good trade, too.

  3. Kevin Feb 19, 2011 9:16 am

    Greta post and very true. Oxy was a great example of this…..I bought a breakout around 2/1/11, got shaken out hard during the pullback and didn’t re-enter, missing a near parabolic move since then. Would be much better if I waited and pounced on the pullback.

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