I did a Webinar, hosted by Maria from Exante, on The Anatomy of Trading Breakouts (Link in Reference Section).
We discussed about the Characteristics of Price Breakouts, followed by building a Trading Plan, using US Equity BDX as an example.
This is the BDX Example in writing.
For each Price Chart, I'd go through 5 Steps, to judge the breakout potential.
1) Identify the Overall Trend
The first thing is always to identify the trend of the market.
For Reversal Breakouts we should have Sideways Trend and for Continuation Breakouts, the trend should support the potential breakout direction.
In BDX it is clear that the overall trend is .
2) Look For a Long Period of Price Build Up
A breakout needs a long period of Build Up, usually in the form of a Chart Pattern.
In BDX we observed a Pattern formed.
3) Look For a Clear Price Level, Whereby We Can Expect Stop Loss Orders Resting Beyond that Level
Breakout trading is in a sense, a form of "Stop Loss hunting".
For BDX , we noted resistance at 148.00.
However, I also note a minor spike to 149.60 at 2015-03-03.
To be safe, I will set 149.60 as the breakout level.
4) Is There Any Nearby Support or Resistance Levels That May Halt The Breakout Move?
Any nearby S/R levels may become obstacles and slow the breakout move.
So I will look for such obstacles, the lesser the better, none is the best.
For BDX , it is trading at historical highs, so we have a "Best Case Scenario".
5) Is There Any Other Technical Studies that Support a Breakout Move?
Lastly, I will look for any other supporting evidence that will strengthen the case for a breakout.
For BDX , the price action from 2015-06-16 to 2015-07-28 looks like a potential 5-wave pattern.
From these 5 Steps we established the following:
a) Trend is
b) There is a Continuation
c) There's likely an accumulation of Stop Loss orders above 149.60
d) There is no historical resistance levels impeding a breakout
e) We have a likely 5 wave pattern in the making.
Therefore weighing the balance of probability, I can deduce that there is a strong case for a Continuation Breakout.
In fact the breakout has already happened, shortly after the webinar.
Now the Execution Part
When both X) and Y) are TRUE:
X) Price does a daily close above 149.60 (already TRUE on 2015-07-28)
Y) Entry price is not cheaper than 149.60
Below 145.50, determined by price action.
Shifting of Stop Loss when slightly Profitable
We can consider shifting the stop loss to below the breakout level (149.60), if price breaks slightly higher, say 153.00
This is to protect Capital from the risk of loss, in case of a false breakout.
All long positions should be closed by 2015-Sep-18
Besides a Stop Level based on price, it is prudent to set a Stop based on time, especially for trading breakouts.
If price is unable to reach the price targets within a limited time, it is no longer a breakout move and all positions should be closed.
Profit Level 1 at 160.00
This is measured from the height of the Consolidation and projected from the breakout level.
We can consider closing 50% position at this level.
Profit Level 2 at 170.00
This is measured from the breakout move, occurred before 2), and projected from the base of the Pattern.
All long positions should be closed at this level.
So there you have it, the explanation of how I scan for breakouts and craft a trading plan.
The Anatomy of Breakout Trading Webinar> https://www.youtube.com/watch?v=yqzt7e103Fo ( BDX example at 43:15)