The Quest for Certainty
Anyone who is familiar with my investing methodology knows how I feel about certainty. And the purchase of breakouts, whether from an area pattern, a trend line, or etc is a form of acting only at a moment of presumed certainty.
For example, during the past 12-13 weeks (check those archives!), I repeatedly suggested that Flir Systems/FLIR warrants your attention (read: buying interest). The called-for breakout was ~$32, the stop ~$28, and the potential trader's reward a quick rise to ~$42-44. Moreover, I stated this rise should begin approximately late-February.
My methodology, to purchase weakness and sell strength, means that, in this instance, I am a buyer as close as possible to the stop ($28), which serves to lessen the risk. Why instead lessen the reward by waiting until the breakout above $32? (Since achieved on Friday, 4 March; see chart below.)
Although this chart pattern counts to $42-44, it does not betray how or when it will arrive at that level: straight up, or in a meandering manner. (BTW, this does not equal that it cannot rise farther, or even that it will achieve the count.) So what benefit accrues from waiting for the breakout to occur before buying? You would instead pay $32, $33, or $34 while still maintaining the same stop level, $28. All the trader or investor accomplishes by waiting is increasing his or her exposure, and thus risk. The by-product of certainty is a higher price, increased risk, and lessened reward.
After a breakout occurs are several scenarios of equal likelihood:
*50% of the time it tests the breakout, and
*50% of the time the stock runs.
For example, during the past 12-13 weeks (check those archives!), I repeatedly suggested that Flir Systems/FLIR warrants your attention (read: buying interest). The called-for breakout was ~$32, the stop ~$28, and the potential trader's reward a quick rise to ~$42-44. Moreover, I stated this rise should begin approximately late-February.
My methodology, to purchase weakness and sell strength, means that, in this instance, I am a buyer as close as possible to the stop ($28), which serves to lessen the risk. Why instead lessen the reward by waiting until the breakout above $32? (Since achieved on Friday, 4 March; see chart below.)
Although this chart pattern counts to $42-44, it does not betray how or when it will arrive at that level: straight up, or in a meandering manner. (BTW, this does not equal that it cannot rise farther, or even that it will achieve the count.) So what benefit accrues from waiting for the breakout to occur before buying? You would instead pay $32, $33, or $34 while still maintaining the same stop level, $28. All the trader or investor accomplishes by waiting is increasing his or her exposure, and thus risk. The by-product of certainty is a higher price, increased risk, and lessened reward.
After a breakout occurs are several scenarios of equal likelihood:
*50% of the time it tests the breakout, and
*50% of the time the stock runs.
Furthermore,
*50% of the time the shares scream immediately higher, whereas
*50% of the time the shares meander to their objective...
...If the shares even rally to the objective.
And this reason is only one of why I rely on volume to lead and/or confirm a breakout. (In fact, volume is one of my critical four indicators, with the other three being price, pattern, and trend.) The confirming volume that occurred on Friday's breakout, combined with the leading volume that occurred on the scheduled day (Wednesday, 24 February) offers augeries for the positive resolution of this specific opportunity.
posted by David M Gordon | 2:26 PM
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