The Tycoon Report

How to Watch Out for False Breakouts!

Wow, what a month! It was a great July for traders with tons of profitable trades throughout the month. One thing to bear in mind this week is that cash levels at mutual funds dropped to 4%. That is the lowest level since hitting an all time low in March 2000.

This market's starting to look very overbought in the short term. That doesn’t mean the party's over, but we did have a hard time finding new trades this week. There was plenty of action to be had but not on our terms.

What does that mean?

 It means that we’ve learned that in order to make money consistently in the market, we only invest under the right conditions. Too many traders make the mistake of jumping on any action they see.

 We might go months without trading if we’re not seeing the action we want. Then when the action's good, we may run hundreds of trades. Let me put it to you this way: would you plant tomato seeds outside in the middle of winter? No, of course not. It’s the wrong season, and they’ll die. You’d wait till the Spring, and when the time' was right, you’d plant as many tomatoes as you want. Not all of them will bear fruit, but the vast majority will. The same is true for trading. Through the use of our technical analysis, we know when we should be planting our “tomato seeds” and when we should be sitting in front of the fire drinking cocoa with the family.

 This is a difficult concept for most individual investors to grasp. Even my own investors will get on me for not running trades all the time. There's a saying in football that I always remember: “If you listen to the fans you’ll soon be sitting with them!”

 Cruel experience has taught us that the most important key in making money in the market is NOT LOSING MONEY IN THE MARKET. Sounds kind of simplistic doesn’t it? What this means for us is that we thoroughly analyze our downside risk. We always know where we are exiting the trade before we get in to it. We use very narrow stop losses, usually between 8%-12%. That’s why we don’t buy extended stocks; it’s too easy to get stopped out.

 The way that we successfully use this strategy is we either buy at the bottom of a trading range or on a break out to a new trading range but ONLY if it’s accompanied by large volume. Too many traders get fooled by false breakouts, it’s easy to do. We always look for at LEAST double the normal trading volume on a breakout if we’re going to play it, and so should you.

 Trade easy this week, buy on pull backs and remember, let the game come to you.