There are two natural ways to fade a breakout. First the turtle soup, which usually sells as soon as price jumps back through the resistance level it broke through in the first place. The second is to look for a larger resistance level above the smaller breakout level, and sell into that. Both ways give you natural exit points if you're wrong.
Turtle Soup is the invention of Larry Connors and Linda Bradford Raschke, detailed in their book *Street Smarts*. Basically it involves fading breakouts (and breakdowns), and is similar to the B2B pattern well-described by Victor Sperandeo in his Trader Vic volumes. Turtle Soup gets its name from the Turtle Traders of Richard Dennis fame, whose system involves playing n-day breakouts. Because many of these breakouts fail and do trap many traders on the wrong side of the market, fading them with tight stops can be very profitable.
BAsically, I trade illiquid things. I'll take a few k, then super snet stuff out of my way, break it out above the resistance point. Usually on something trading a half million shares, 5k in snets all at once clears em out. Then I just sell into the buying pressure and scalp the half. If I know it's not a breakout and just me breaking it out, I can even get short and play mm and cover when the panic buyers pull back. I'm speaking of using this on the daily charts in well defined breakouts. I often also fade other breakouts. 90% fail, so the odds are in my favor. Even if it works, It usually shakes enough to get out flat at some point. You just gotta know what you're doin. Most of the mm's in these names are ametuers, and you can fake em out with size. As per nyse, I can read most specialist pretty easilly, so I can play it in that way. I always buy before the move, and scale out as the buying starts. Since the specialist will short this move, smart money is to short with him and cover when he shakes it.
trading b/out downs I believe is rather rewarding (as long as it has room to run -- as opposed to resistance/support close by) because if you are flexible and responsive you can close the position quickly when you see you are wrong. Even if you are wrong 90% of the time, you can make money if you let your winners run and cut losers quickly. Its not about being right its about making money. And that is based on your expectancy
The stuff I do is based on break out/break down actually. The simple fact is, for a stock to move from 50 to 55 intraday, it has to go through 51 52 53 54, and it has to give a few break-outs, they cannot all fail. 9:30-10 tends to be chaotic, but break out/downs out of low volatility pockets are quite reliable after 10am, on the most liquid nasdaq stocks, as nobody has the guts or buying power to manipulate. During the bear market we had in the past months, momentum was truely great, and entry/exit wasn't that important, you short something blind-folded you make money.. nowadays the stuff is more choppy, the key is DO NOT CHASE.. if you missed the entry, wait for a pull back, roughly I think 70% time there is a pull back after the initial break out, or a mini-squeeze after the initial break down, get the positions filled during that mini correction is very low risk. I can risk 1/4 to 1/2 for potential reward of 1-3 points, and the failure rate is not that high either.
Ken Calhoun recommends trading his style of breakouts/breakdowns. He nails a lot of winners this way. For instance, today you could of made a killing. About 2:30, damn near everything on the NAS broke out. Can U say MULTIPLE POINT WINS!!! BTW, anyone ever hear of Ken Calhoun? tradeRX
Is this possible that many breakouts fail because in reality stock toped out even though it looked like a break out? Vice versa in the other direction. Is there a way to tell a difference? Thanks, Bob