Ask Colin

I really enjoyed the seminar in Sydney and got heaps out of it. A quick question on your breakout method. We enter a trade on a breakout above resistance... If the breakout is very large and moves far above resistance, would you buy with 1/3 of the position on the next day simply because the entry criteria has been met or would you wait until the second entry criteria (the pullback to resistance) and buy with 2/3 of the position?

The breakout definition in point and figure charting is that you have one box above the resistance level. This implies an intra day high is enough because p&f charts are generated in the high and low for the day. It therefore follows that if using bar charts, an intraday high is enough. However, the box size in p&f charting is making an additional requirement, which in bar charting probably translates into at least a 1 to 2% higher high.

I am not entirely happy with such a mechanical approach, though. I like to see a clear breakout. If in doubt wait till it is clear. What is a clear breakout is subjective, but we usually know one when we see it. If in doubt require more evidence before acting.

I will buy an initial 2% of equity on any breakout, subject to the position size rules allowing it. However, that said, sometimes I may decide not to chase one that has gone too far. Guidelines should always be subject to us using our judgement in unusual situations. This is not an easy issue to deal with. Often the position size rule will not allow a minimum 2% of equity position on a big breakout. However, when it is allowed, I have often found they work out quite well (make sure though there is not a takeover - these are a special case).

I hope this clarifies it for you.


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