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The Curse of the False Breakdown | The Mesh Report

The Curse of the False Breakdown

John Thomas July 11, 2017 Comments Off on The Curse of the False Breakdown

We’ve all been there.

The second we stop out of a losing position, the stock does a U-turn and roars back to the upside, making us look like total dummies.

I have been hit with two of these in recent weeks, stopping me out of longs in Facebook (FB) and Biogen (BIIB).

Please note that both stocks are much higher today.

However, there are strategies to fight against this trading eventuality.

Despite getting clocked twice, I am still having one of the best months of the year.

Of course, you can blame computer driven algorithms for this affliction, which have vastly gained in importance in recent years.

Algo’s identify key support points on the charts.

They then place a large number of sell orders into the market to break that support.

Stop loss selling is triggered by traditional technical driven strategies.

The high frequency trading then take their profit buying up that stop loss selling and taking the price back above the support level.

It happens on the upside just as often, delivering false upside breakouts to bedevil short sellers.

To keep my ten-year performance moving to ever new all time highs I have devised a set of rules to minimize the impact of false breakouts.

1) Keep a larger number of positions, at least a half dozen. That way, the gains of the many will offset the losses of the few. Diversification is the only free lunch out there.

2) Stop out faster. It’s easier to come back from a few small losses than a few large ones.

3) Keep an all asset class long/short trading book. If stocks are melting down, it is unlikely the same is happening in bonds, energy, commodities, foreign currencies, and precious metals.

4) Keep individual stock positions to a minimum. False breakouts and breakdowns affect stocks more than any other assets class.

5) Only invest in big stocks, which are less prone to short-term manipulation than smaller, illiquid ones.

If you are one of the thousands who have been following my Trade Alert service, you already know that these rules have been working in my trading book for quite some time.

You have probably also noticed that performance drawdowns have become much smaller and less frequent.

The goal of all of this is to minimize the volatility of my trading book while keep the overall profits flowing in in all market conditions.

So far, so good.

 


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