This is a general query which I keep getting in various forums or training sessions.
How to avoid False/Failed Breakouts ?
- Before understanding how to avoid false breakouts one needs to understand and accept that you will keep getting a lot of whipsaws as in any form of trading one cannot expect 100% hit rate or be happy with 40-70% hit rates.
- Most of the discussions in spotting false breakouts will be in hindsight and more of a post-mortem analysis.
- The failed/false breakout can hurt in two ways. One way is if you do not keep a stoploss and second is after hitting your stoploss and taking a little more down tick it comes back to your price and maybe goes higher. ( The second one is a much bigger psychological hit.)
- At the same time a stock which was sold early in a trend does not hurt that much. Both are potential money making opportunities in hindsight. But why do we not look at those missed opportunities more?
- In my View - The day you start focusing on how to make more money when you are right instead of focusing on how to increase your hit rates is the day where your performance and peace of mind would get better.
- In simpler terms – A false/failed breakout is nothing but a Stoploss hit.
- What one needs to learn is not how to avoid false breakouts but to be disciplined with your strategy.
Lets look at a recent example which i was very bullish on – Manappuram Finance.
- The stock gave a breakout above 104-106 range after 4 attempts in the last 1 year.
- There was a little volume pick up as well.
- After making a high of 110 the stock went downhill.
- A simple stoploss of 20 dma would be hit at 99-102.
- But the real psychological pain starts if the stock ends up at 150 and with me not having a position
I generally do not prefer any post mortem analysis on how one could have spotted that Manappuram false move !! What i try to look for is omission mistakes where one misses out a big move which was on your radar but did not execute.
Technical Analysis Training Mumbai
23rd and 24th September
9 am to 6 pm
Hotel Karl Residency
36, Lallubhai Park Road
Andheri (W), Mumbai, 400058
Maharashtra – (India)
Rs 16520 ( 14000 + 9% CGST and 9% SGST ) ( No Discounts )
Registration and Payment Link