Stock Market Trading Strategies: Volume Breakouts That Fail

Stock Market Trading Strategies
Stock Market Trading Strategies

Stock Market Trading Strategies: Volume Breakouts That Fail

Stock Market Trading StrategiesThis brief and straight-to-the-point video addresses the issue of trading breakouts, which is one of the most popular and commonly taught stock market trading strategies.

Unfortunately many day traders and swing traders find that breakouts often fail. In fact their seem to be more false breakouts now than ever before.

By the way, the title says “Stock Market Strategies,” but what you’ll learn in this video applies equally well to futures, E-minis, commodities and Forex.

Enjoy the video and please leave your comments below.

You’ll find the text below the video if you want to follow along.

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Video Text:

Welcome everyone. This is Doctor Barry Burns with Top Dog Trading. And today I’m going to share with you, one of the most popular stock trading strategies that is well known and used by many, and it’s a good one.

However, today I’m going to show you little nuances that you need to be careful with. Breakouts don’t always work quite as well as people think. But there is an answer to that and I’m going to share that with you in this short video.

So, the strategy is very simple. Basically what we’re doing is, you’re looking for a previous high like this, and then you’re looking for a breakout. So breaking out of that high means you would get a higher high and what you want accompanied with that in this particular strategy, the way that it’s designed is, you want to see volume going with it. Good volume and so here you’ll notice when we get this big move up here, we did have an increase in relative volume.

Then volume declines a bit. And this bar here, we get a little bit of extra volume. It’s not real significant but we do get some. We do make a higher high. Now more significantly those move forward. Volume pretty much stays down here and then we get this big volume bar.

Now doing the same thing, we are going to look for this high here to be broken. So in this way, sometimes volume even be a leading indication, I am not going to say indicator because volume’s not an indicator, it’s just what is what is. Doesn’t indicate anything, it actually measures an actual number which is how many shares are coming through the market.

So this would be an indication that we should break this high and continue with the uptrend. Right. So that’s the traditional thinking and many times that is true.

And let’s see what happens. so the very next bar, yup indeed, it makes a nice gap up. So if you are following this strategy, the typical way to trade this is to wait for to break above the previous high and then when it does, on volume we get 2 bars of nice volume here. Then you would buy, and hope that it continues up. Okay, so let’s see what happens.

So then after that, market, well wait a minute, comes down, comes down, ah oh. Now it broke even below, so if you look over here, these lows, it broke below those lows. Hmm.

Not exactly what we wanted right. We are looking for this thing to buy here and for it to go up. And instead, it actually comes straight down. Comes all the way down to, that’s the 50 period simple moving average, that green line.

It broke these lows. It really didn’t go up at all. Other than that one bar, and then it continues to move down even further.

So what went wrong? What’s the problem? The problem is very simple. As with all stock market trading strategies, it’s contextual, meaning that the strategy works when done in the right context, with the big picture of the overall chart. So let me show you what I mean, when we look at this, we see that the market has already been moving up for quite a while.

So we have these waves. Let me bring out my little arrow here. So we got to move up, and then this would be a trend retrace of consolidation, another move up, retrace or consolidation, another move up, another move up.

So if you use this, just for counting the waves, you would have 1, 2, 3, 4, 5, 6, 7 and what that means is that is now in extended trend. Counting waves this way, the average wave count is 5, which would be right there.

Again 1, 2, 3, 4, 5. 7, and what that means is this is an extended trend and therefore that’s actually a good place to start potentially looking for reversal trades.

Now don’t just take them, there are separate rules for when those are high probability. But at the very least, it’s the low probability for the trend to continue. Therefore, yes indeed we do get high volume on the breakout. But now that volume is to be interpreted differently, that volume is to be interpreted as exhaustion volume rather than continuation volume.

So the bottom line rule is very simple when looking at stock market trading strategies such as this. Early in the trend when we get big volume coming through. Bigger volume coming through on the market. And breaking these highs, then you have good odds of market continuing in the direction of the trend.

The longer that trend continues, the more likely it is to not be continuation volume but rather exhaustion volume, showing the exact opposite, showing a high probability end of the trend. So seeing the big picture, the devil’s in the details, things are, you know the simple rules are nice to have, but simple is good up to a certain point.

Then to become a professional trader, you need to understand the new answers. So that you don’t get hurt.

Leave a comment below telling me what other stock market trading strategies you’d like me to teach in the future.

Also I am giving away one of my favorite trade strategies. Just fill out the yellow form at the top of the side bar on the right. Once you do that, I’ll personally send you an email with first video.

For another video on stock market trading strategies and chart patterns, learn about how to trade Triangles like the pros. Simply click here:

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  1. Dr. B: You captured it succinctly and correctly. By having fractals offering two more views views of the market- you relieve yourself from forming a myopic view of market conditions. I hope I am not over-paraphrasing your intent Dr. B. But this message is so, so very important.

  2. Hello Barry, Thank you for the video. Very helpful actionable material as always. I was particularly interested in your approach to wave counting. Whereas Ellioticians tie themselves in knots trying to fit price action in 5 waves impulse plus ABC correction, you count more, or as many as you see on the chart. I know that you also do this on momentum indicators. Looks like a very useful idea and simple approach to knowing if you are overbought or oversold. Any more tips on your wave counting approach would be much appreciated.

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