[isatrader]

Dear group,

I hope this has not been covered before. How do you actually buy shares? The book covers setting buy-stop orders on a good until cancelled basis to automatically buy shares on a breakout. However, the online service I use does not offer this (I'm in the UK). I'm not sure if this an often offered facility for mainstream services.

Even if it were offered I can see some issues - as you don't know exactly when and if a breakout will occur you will be wanting to set up multiple buy stops in place. However, multiple buy stops add some danger - you may end up with more commitments than you have been expecting.

Personally I'm watching stocks like a hawk and buying within a day or two of a breakout. However, it seems that a lot of stocks jump suddenly and I've found myself buying on a peak before a pullback. I'm sure in time that the majority of cases this issue will be moot in the long-term but it can be somewhat alarming to find myself buying a share only to make a loss at least for the short term.

I suppose one way around the buy-stop issue would be to set up a CFD account as they seem to offer more stop features. I presume that if you are careful with the stops then that does limit the risks - and I note that at least one provider limits liability to just the value of the account by closing the position so you can never owe them money. However, I a bit wary of the CFD route at present - not for widows & orphans etc. It also seems to me that CFD accounts are aimed at day traders - not what we are doing here. I suspect another strategy would be to keep a bit of cash in the standard share account - buy on the CFD and then if is a keeper simultaneously sell on the CFD and buy on the standard account - having the same effect as transferring the shares.

Any thoughts?

Pete

Hi Pete,

This has been discussed a few times, but it's a big site so I'm happy to go over it again for newer traders that haven't come across those discussions yet. Basically, this is one of only a few areas that has changed since the book was written back in 1988 as the market has evolved due to technology and so there is a much higher rate of false breakouts. So, the method has changed slightly and no longer suggests using buy-stop orders in the way described in the book for investors, and instead emphasises buying a strong "close" above the breakout level. I spoke to Weinstein earlier in the year about it, here's the Q&A on that topic:

Me
Q. The book had a whole section on buy-stop orders, which I presume has been dropped over the years due to false breakouts that you would get these days? As I read your Technically Speaking interview from 1997 in which you were talking about buying a strong close above the breakout level, and also note in the GTA reports I’ve come across that you always say something like “A breakout (on a closing basis) above that level would be the signal to do buying”. So I’m assuming that the buy-stop section from the book is now void, and that we should be looking to buy breakouts near the close of the day if they are above the breakout level and towards the high of the day?

Stan Weinstein
A. Because of the increasing amount of false breakouts, investors should only do buying when they see that the breakout isn’t false (and that it closes above the given level). However, a trader should do at least partial buying on an intraday basis when it breaks out above the given level (using a buy stop order), and then if at the end of the day it turns out to be false and it closes back below the level, then traders should immediately get out. But if not false and it hasn’t run too far, then later in the session, traders too can do additional buying.

So, as you can see from the reply it's different depending on whether your are a trader or an investor, as an investor should wait for strong close above above the target level they are watching before getting in. So in practice you can set an alert in your chart software (if it has that option) to notify you by email when the target level is breached and then be ready near the end of the trading day to buy if it's going to close the day strongly above the target level. So, you'd buy in the last 5 to 10 mins before the close of the day imo.

For a trader it's different as for example if you are in the UK then you can use a spread betting or CFD account, which both have the option to do a partial buy stop order order like he suggests in the answer above and then complete the purchase near the end of the day if it proves to not be a false breakout, or get out of the partial position if it closes back below the breakout level for a small loss.

Another way to avoid false breakouts is to make sure that you only trade A+ picks that meet the four main requirements of the method. i.e. price action breakout with a rising 30 week moving average, at least 2x the weekly average volume, relative performance above the zero line and above any near term resistance. As you'll find that you get a lot less false breakouts if you really focus on meeting all the key criteria of the method. So focus on the quality of your picks and don't settle for anything less.

I hope that helps.