Breakout Strategy, 1.000.000th attempt

Testing it and running the stats!

O.k., my small cap stuff is working well and making progress.

Current book:

Here is the subject:

Still working on a breakout strategy. (Work in progress, testing with litle money and running the stats!).

First of all, my thesis is that breakout strategies work well, when Residual Variance Strategies show strength:

It picks stocks that have a huge shorter term reversal but still positive:

It is basically a quad2 strategy, mostly penny junk that gets a bid when they torture the shorts.

There are other measures to see when a breakout strategy works, you pick yours: Market uptrend, Industry Group uptrend, theme in play (AI, whatever), are breakouts working lately (e.g. does the screen produce positive results?)…

Now here is the screen:

It picked for example Shop, CVNA etc. the last week.

Now here comes the chart pattern. I use only the 15 min.!

Why? I do not have to check the daily, because the last screen criteria makes sure that the stock is breaking out of the 50 Day Donchian channel. The less screen I have to check the better for me (but that might be different for you)!

Let us pick CVNA as an example:

I do not buy at the open, I buy 1-x days later, and I want to see that the 10 and 20ma (on the 15 min. chart!) catching and have a positive slope while breaking the trendline (it needs to be at least flat and have catched up!).

Also, I want to see a trendline break as you can see above.

The stop loss would be on the 20ma (on the 15 min. chart!), on CVNA it would have been a 3-4% SL.

On Shop it would have been a 2% SL (took that one!!!):

Make sure you adjust your position size; it should be smaller as your stop loss gets bigger.

So, for me, since still in the research phase, it would be 10k on a 2% SL. 5k on a 4% SL etc.

You will get some breakouts on bigger cap names (like Google 2 days ago), those are not real breakouts since the relative volume is not that high. I keep it that way since it gives me a feel on how bigger cap names do. But I choose the mid-caps in my trading, since they give you more zing for the buck.

Also, the scan only gives you stocks that had a 15 Million volume day in the last 25 days, you will not get a lot of hits. That makes sure you will miss a ton of moves ;-)

But it will also make sure that you see the tree in the forest!

And it keeps you out of moves with low volume! Again, use discretion: If you see Google breaking out that gives you the information that Google is breaking out, but that does not mean that the volume is relatively high. So, check the market cap before you take the trade, the lower the market cap the higher the significance of the move, or better: the higher the relative volume on the breakout the higher the significance of the move!

Still: the fact that mega caps are strong (seeing Google breaking out even only on normal volume) gives hints, that is the reason I do not work with relative volume.

So if you see the following:

Relative low market cap and monster high volume (relative to the stocks volume history) + a hot theme (optimal) you might be on to something.

Selling: 50% gets sold if I make 5 times my stop loss, the rest gets trailed (still working on it!).

Why is it working? My assumption is the following: it is based on human behaivor:

Let us look at CVNA on the daily:

So what is the situation: the stock popped, retail got sucked in and most of them are already out of the trade because they are stopped out!

Now it is hard to buy a breakout, but buying a breakout after you have been stoped out once is even much harder! Hard things work.

Now Shop:

Different story, everybody that bought premarket or the open is in the green. But the stock has a 50% retracement (talking about the breakout day) from its high. And now everybody is scared that the breakout fails, weak hands already sold?

Now if now buying sets in (the second or the third day) who will it be? Retail? I doubt it, my best guess is it is institutional (short covering and long only funds):

It is harder to buy on the second or third day (or on the 10th day). “Men, I missed that whole move, I cannot buy now”. Momentum is hard to buy.

Hard things work, hard things are hints for robust strategies, because one thing does not change: human behavior! (Do we all drink only water, work out, eat well and sleep enough, no drugs? Well, it would make the trick, but we don’t!).

ISEE is another example (last year):

AI (saw it realtime, but did not take the trade, framework and I was not ready (“oh my god I missed the move”)!

I want to choose a situation where tons of long traders are stopped out or scared to death.

Then if the second wave of buying sets in (make sure the 10 and 20 ma catches up and have an upward slope!) I take the harder trade.

Also, when do shorts get nervous?

(On the side: Well, definitly in Quad2 since most shorted stocks do well then).

On the first day, on the first pop (“let us hope the breakout fails”)? Or on a continuous second move (“damn, this might have legs, I can not stand the pain”).

As I have written, all work in progress, I keep you updated. Could be all a total waste of time, but I give it a try and run the stats!

Best regards and all the best.

Andreas

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The information on from Andreas Himmelreich / QuantStrike and this video / blog is for information and discussion purposes only. It does not constitute a recommendation to purchase or sell any financial instruments or other products. Investment decisions should not be made with this video, and one should consider the investment objectives or financial situation of any person or institution.

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