17 Aug The Best Way to Enter a Trade
The Best Way to Enter a Trade
Aug. 17, 2022
There are many techniques we can use to become an elite tennis player.
The problem is that many of them don’t work very well.
At least, they don’t work for us.
I’ve seen many coaches with one good player. Unfortunately, the coach’s eccentric techniques only worked with that one person. The rest of his players are not very good. Yes, his coaching obviously worked. But it most likely won’t work for you or me.
A better technique, the best technique, would be the one that works well for everyone.
The same goes for trading. There are a ton of different ways to trade. But most of them don’t work for us.
Take value investing, for example. We could love Warren Buffett and try to emulate him by buying things on sale and holding forever. That obviously worked for him.
Unfortunately, buying “on sale” based on fundamentals can lead to deep underperformance. On Monday, I showed a value (Magic Formula) portfolio from 2020 that’s barely made anything. Meanwhile other traders have been putting up returns from 70% to 1,000%.
Buying and holding for many traders is a bad deal. Buying and holding a value stock isn’t much better. Value investing works, but how can it be best when it underperforms?
For something to be best, it has to work for everyone.
So, what’s “best”? For that answer, we can read about famous traders. Nicolas Darvas struggled for years until he switched to a technique that made him one of the best traders of all time. He wasn’t alone.
If you study the ones who are putting up really big numbers, they all do the same thing. And almost every one of them, if not all, struggled before switching techniques.
What’s the magic technique? Breakouts. What did they switch away from? Fundamentals.
Breakouts seem to work for almost everyone. They’re the magic cure. But how do we do it?
There are many ways to trade a breakout. We can look at price making new highs over a certain number of bars. Or we can look at price making new highs over a certain time period. This week we’re examining the latter.
What does it mean to trade new highs over a certain time period? It means trading a breakout if it’s the new high for the year. Or maybe an all-time high.
Or maybe a new monthly high.
Back in May 2020, I did a video on trading New Monthly Highs. You can see it here: https://www.youtube.com/watch?v=wqxd7RLcI50&t=309s
In that video, we looked at New Monthly Highs on Apple (AAPL). If AAPL made a new high for the month, we went Long. Pretty simple and pretty sensical. Institutions look at monthly performance, so they probably care about a new high for any given month. In addition, if price is making a New Monthly High, it could be starting a big trend.
The crazy part about the system from the video was the exit. There wasn’t a stop or a target. The only exit was a New Monthly Low.
We get in when AAPL makes a new high for the month and we don’t exit until AAPL makes a new low for any given month. That can’t possibly work, right?
But it did. In the 2020 video, AAPL had thrived using this simple methodology.
How has it done since 2020?
AAPL has continued to thrive on New Monthly Highs:
That’s pretty hard to fathom.
In short, the first day of the month is the benchmark. If price goes higher than the high of the 1st Daily bar, that’s a New Monthly High. If it goes lower than the low of the 1st bar, that’s a New Monthly Low.
Just doing that produced AAPL’s numbers.
In the video, I also mentioned TSLA and AMZN. How have they done since 2020? Here’s TSLA:
And here’s Amazon:
AAPL is the best one of the group, but it’s nice to see that this system is producing hypothetical profit in other things.
In all, it seems breakouts are indeed an excellent choice to make money trading.
In our next Newsletters, we’ll take a look at some other instruments and possibly add something to our simple breakout system.
Talk to you soon.
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.
HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.