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Trading Lessons

Every Breakout Needs This Confirmation

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Written by Timothy Sykes
Updated 5/10/2022 6 min read

Hey Trader. Tim Here.

You’d think in a market as nasty and volatile as the one we have right now, my students wouldn’t be struggling with this…

But they are…

You see, while most of Wall Street is trying to figure out where the bottom is on big-name companies…

My students and I are focused on a completely different set of stocks.

I’m talking about stocks that are breaking out to the upside in a wicked bear market.

Believe it or not … there are tons of them.

The challenge is identifying which are breakouts and which are fake-outs.

For my money, there is one tell above them all — volume.

And I have a simple solution to help you identify this correctly.

I want you to be able to look at a chart, like Better Therapeutics Inc. (NASDAQ: BTTX)…

…And figure out where the true breakouts are.

Here’s how it’s done.

Reading the Tape

Take a look at the following chart of BTTX:

You’ll see two arrows that point to spots where the share price broke the previous high.

In the first one, shares pushed above the premarket high and closed nicely above.

In the second, shares spiked above the highs from the prior day but fell back shortly thereafter.

Just looking at these two examples, the difference is painfully obvious. The higher trading volume (at the first arrow) was almost 2x the lower trading volume (at the second arrow).

Surely, that explains why the first breakout survived while the other died.

Now, let’s take this a step further and expand our view…

I selected three breakouts on the same day. The first two breakouts moved higher, while the third failed.

At the bottom, you can see that the trading volume spiked for each breakout.

So … what’s different here?

Take a closer look at the volumes for the three breakouts:

In each of the breakouts, the trading volume spike was lower than the last one.

This simple concept is your most powerful volume analysis tool. It can be summarized as follows:

When volume decreases as a stock makes new highs (or new lows for that matter), each subsequent breakout loses its strength.

Simple enough, right?

My Biggest Pitfall

If this concept is so easy to grasp, why do traders struggle to use it correctly?

It comes down to how we trade.

Let’s go back to that first breakout that reached (and stayed above) the premarket high:

Practically speaking, if you had waited for a candle close to confirm your trade — you would’ve missed the boat.

That’s the nature of the beast.

But is there a way to forecast when this might happen?

Yes, there is.

My friend/former student Tim Bohen teaches his StocksToTrade Advisory group about a concept known as VWAP hold.

Essentially, he watches to see if a breakout stock, like BTTX, holds VWAP into the late afternoon.

I like using this method as a simple way to help traders identify a stock that’s run hard, yet still retains strength.

From there, you can look for a pattern, like so:

See how the volume rose relative to the last few hours, creating a bullish move into a small consolidation?

That last candle before the massive breakout actually closed above the high of the regular trading session.

We can use that as a signal that the stock wants to run into the close. But again, it all depends on the context.

If I saw this same thing at noon, I might not be as thrilled. The same would apply if I saw this happen after whippy price action.

Specifically, this works because:

  1. Volume increases
  2. That volume occurs with a bullish move, relative to consolidation
  3. Share price closes candles above the high of the day
  4. This occurred into the close

Using this framework, you can look for a run above the premarket high (or more), with a stop at (or below) the low of the day.

Most traders look at all spikes in volume and breakouts the same. But they’re not.

You have to view them in context. That means looking at:

  1. Time of day
  2. Whether shares have broken the high or low of the day so far (and how they did it)
  3. Volume (and volume trend) up to that point, relative to the day

Now, compare the chart above chart with the second breakout noted in the chart below:

This setup doesn’t look as good because:

  1. Volume didn’t increase that much before the breakout
  2. Shares were already over the high of the day
  3. This occurred towards the late morning (when volume tends to die out)

When in doubt, look for obvious signals rather than subtle ones.

If you have to think too hard about it, it’s probably not worth it.

Final Thoughts

These concepts take time and practice.

But you don’t have to do it alone…

That’s why I want you in my Trading Challenge.

Over the years, I’ve taught thousands of students to trade the markets and develop their own unique styles.

And now, I want to help you.

Click here to join my Trading Challenge.



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Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

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* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”