Newbie questions on potential breakout

[Init]

Hello. I am relatively new to stocks in the sense that I am recently taking it more seriously. I wanted to put forward a few of my ideas for critique to get a feel whether I am heading in the right direction. I am not looking to invest immediately at the moment, more just predict and test until I feel I understand the market better.

Looking at SBM, over the last several months there has been an established horizontal line of resistance on the upper price tested 3 times with an ascending resistance level for the lower price soon to be tested 4 times. Essentially looks like an ascending triangle breakout. Over the next few days I would be looking for an upwards breakout pattern to capitalize on.

In terms of company metrics like PE ratio and EPS etc. I am not really sure how to analyse the this data to gauge whether the company is likely to breakout in the positive direction. Are there some strong indicators that people usually look for?

Since SBM is a gold mining company and the price of gold seems to be in an upward trend, does this add more validity to the possibility of a positive breakout?

According to St Barbara's quarterly report they are investing in two ore exploring companies (CYL and PEX), I'm guessing to find mineral deposits for another mine. Is this considered a move that is positive and would indicate likely growth? Would I expect the success of any one of these companies to positively affect the other?
Looking at gold production for their two mines, the one in Australia (Gwalia) produces a lot more than Simberi. This would indicate to me that Aus has higher potential for yield which positively enforces the decision to invest in Aus ore exploration companies.

What other things could I look at to help make a decision?

Thank you for reading.

 

[skc]

Hello. I am relatively new to stocks in the sense that I am recently taking it more seriously. I wanted to put forward a few of my ideas for critique to get a feel whether I am heading in the right direction. I am not looking to invest immediately at the moment, more just predict and test until I feel I understand the market better.

Welcome.

Looking at SBM, over the last several months there has been an established horizontal line of resistance on the upper price tested 3 times with an ascending resistance level for the lower price soon to be tested 4 times. Essentially looks like an ascending triangle breakout. Over the next few days I would be looking for an upwards breakout pattern to capitalize on.

Fair analysis.

In terms of company metrics like PE ratio and EPS etc. I am not really sure how to analyse the this data to gauge whether the company is likely to breakout in the positive direction. Are there some strong indicators that people usually look for?

When you trade the chart it's probably best to ignore PE and EPS etc unless you have done significant backtest to show that breakout is more likely to follow thru when PE is between X and Y.

Since SBM is a gold mining company and the price of gold seems to be in an upward trend, does this add more validity to the possibility of a positive breakout?

Yes it does. Although it's not fool proof, there is meaningful positive correlation between spot gold price and gold stock.

According to St Barbara's quarterly report they are investing in two ore exploring companies (CYL and PEX), I'm guessing to find mineral deposits for another mine. Is this considered a move that is positive and would indicate likely growth? Would I expect the success of any one of these companies to positively affect the other?
Looking at gold production for their two mines, the one in Australia (Gwalia) produces a lot more than Simberi. This would indicate to me that Aus has higher potential for yield which positively enforces the decision to invest in Aus ore exploration companies.

If you are trying to determine the $ value of a company, these things matter. If you are trading price action and the chart, then it best to just stay true to that course.

What other things could I look at to help make a decision?

Here are some but not exhaustive list of things to look for:
- Are there upcoming news or reports? If so do I have a view on these, and do I intend to hold thru them?
- Are there potential for left field events for the industry or the company specifically?
- What do other gold stock price charts look like? Is SBM the best candidate?

All these will inform you about whether to take the trade and how much to risk etc.

 

[tech/a]

As a Pure chartist I look at it a little differently.

A potential breakout of any pattern in this case an ascending triangle needs only 2 things to happen.
(1) Supply to withdraw
and OR
(2) Demand to chase supply to higher levels.

Then as a chartist it is my job to evaluate every bar in the timeframe I choose to trade to make a
call as to wether the trade is going to
(1) Continue in my direction
(2) Stall
(3) Reverse.

I then need to have a trading plan which accommodates all 3.
Be ruthless in execution and mindful of Risk V Reward forever
attempting to maximize Reward V Risk.

As for other analysis it has been my experience that while some short term fundamental
reasons may cause the TWO things to happen OFTEN price advances for no apparent reason
and often in spite of fundamental common sense. PE ratios are a very good example.
However there are many hints often harden to the Un trained in a chart.

Take a look at MSB discussed in "Charts of Interest" a good example.

I prefer to make my trading simple and without ambiguity.
Its simply a business decision--In--Out--Hold--Minimize risk--Maximize reward.
EVEN if I get it wrong as I do often enough! Wrong is good---how long you STAY wrong
is a KEY

Attempting to make as many planets align as a confirmation of a positive out come is
in my opinion a waste of time.

K.I.S.S

 

[Gringotts Bank]

I've done a lot of tests on horiz resistance breakouts and didn't find much. From what I remember the best approach was to buy on the re-test of the line. So wait for it to breakout, then place a buy order at the breakout point + 1 or 2 ticks. This way your risk tends to be lower.

I prefer angled trendlines.

 

[tech/a]

I've done a lot of tests on horiz resistance breakouts and didn't find much. From what I remember the best approach was to buy on the re-test of the line. So wait for it to breakout, then place a buy order at the breakout point + 1 or 2 ticks. This way your risk tends to be lower.

I prefer angled trendlines.

I agree if the breakout is on very high volume which tends to pull back or have an inside day.
Generally on smaller cap stock


Even so you could miss many using this tactic.

"Don't be a DICK for a tick!"

 

[peter2]

I like Tech/a's suggestions a lot, but I don't think the OP is ready for them just yet.

@Init I agree with skc in that you're assembling too many aspects. Fundamentals and chart technicals can combine well, but it takes a lot of experience to do it profitably. Most people start with one or the other. Chose the one that makes the most sense/appeal to you and focus your education on that aspect.

We've got both knowledgable and profitable fundamental and technical traders/investors in this forum. Ask the right question and you'll get a valuable reply.

@Gringotts Bank Thanks for the chuckle. I think the percentage of profitable traders/all traders is far larger than the percentage of competent back-testers/all back-testers.

 

[Quant]

Thanks for the chuckle. I think the percentage of profitable traders/all traders is far larger than the percentage of competent back-testers/all back-testers.

Near on impossible to quantify that one , although i'd suggest the best traders around will use quantifiable systems . Just like some traders think MACD is good many will be backtesting just as shitty things , the best backtesters build EVERYTHING themselves and that by it's very nature precludes most so called mechanical traders . Laziness regardless of methodology is the common theme , if its easy it wont work . I am glad it's hard , the correlation between hard work and luck is tangible ...

 

[Init]

Thank you all for your replies, they are all very insightful.

I can understand how looking at too many aspects may be inefficient, however I was under the impression that looking at few aspects could give you a partial representation of the market dynamics and cause more false negatives or positives.

I agree with tech/a here and in other posts I've read that risk is what you can control - you can decide when to bail. I am still figuring out how to set out risk levels eg.

• do I bail when then share price drops 5% from my buy price (or 10% or 15%)?
• if so, do I execute that trade the first instance the price drops to that price (a stop loss) or do I monitor the share price manually and make the call myself?
• Do I just factor in share price as risk or do I attempt to quantify risk based on other factors (breaking news, chart indicators etc.)?

I get that the market is closer to an infinite variable system and is impossible to predict with 100% accuracy, but being right 60%,70%,80% of the time will still net you a profit if you play the game right.

I ask about indicators because I understand there are correlations which occur with high probability (such as the triangle breakout that this thread is based on) and that while each one individually may not give much indication, a combination of them with emphasis on their weighting or contribution to the result can lead to a better estimate for market direction.

As a rough example, if you looked at a stock that had a triangle breakout pattern, the RSI indicated it was oversold, the MACD 10 day window began to lead the 30 day window and the CCI recently crossed over the -100 margin - you could use those numbers to give a buy/dont buy/sell indicator. Then as you gather more data and see more trends you could begin to put other things in like estimated projected share price after breakout, changing the weighting (importance) of technical indicators based on others, or quantifying news as good/bad and then implementing a weighting factor based on news frequency.

I know, I'm getting ahead of myself and that probably all sounded a bit wishful, but you get the sort of approach I have to stocks.

At the end of the day, I essentially want to create a sort of risk minimisation function that utilises trends, data and indicators that demonstrate correlations between the market state and potential for capital gain. I do a fair bit of programming in my job so I would eventually like to have a go at multi-variable trend analysis using python where I could give a rough prediction of market direction using back-tested correlations between indicators and market direction.

 

[Rypieee]

I get that the market is closer to an infinite variable system and is impossible to predict with 100% accuracy, but being right 60%,70%,80% of the time will still net you a profit if you play the game right.

I try to be right 40-50% of the time (I'm still relatively new to the market) but I rely on my risk management to carve out a profit for myself. In simple terms, if I win 4 out of 10 times, my 4 wins will equal $1500 or more(Min. $6000) and my 6 losses will equal $500 each(Max Loss $3000).

Of course those figures aren't true but the underlying statement is that even with a low win rate, as long as you control your risk and risk/reward, you should work out with the odds in your favour

 

[Init]

I try to be right 40-50% of the time (I'm still relatively new to the market) but I rely on my risk management to carve out a profit for myself. In simple terms, if I win 4 out of 10 times, my 4 wins will equal $1500 or more(Min. $6000) and my 6 losses will equal $500 each(Max Loss $3000).

Of course those figures aren't true but the underlying statement is that even with a low win rate, as long as you control your risk and risk/reward, you should work out with the odds in your favour

Sorry it was my mistake for not really articulating my point properly. What I was thinking was something like 50% is break even, <50% is loss and >50% is gain. Should have just used <0% is loss >0% is gain, derp. I would aim to keep the average > 0% but thats a no brainer.

I guess the difficult part is when you have gotten 6/10 losses - sure the last 4 might be wins but you cant manage or predict that accurately at the time, only your risk. In that regard, since you can't tell what percentage you are going to win in the future, even though you could still win those last 4/10 and come out on top, your risk management might not allow as much investment if at the time you have 6/10 losses as opposed to 3 wins 3 losses. And since the amount you invest is affected, you might not gain as much as you would have if you won those before your losses. Essentially what I'm getting at here is that the order in which you win/lose can change the result based on your risk management even if the percentage gains for those wins and losses were fixed and independent of when you invested.

 

[Rypieee]

True, in the 10 round test scenario, a 6 consecutive losing streak would have your account balance lower so the 4 wins that comes after starts off on a smaller base but that would be a very negatively skewed result wouldn't it? I am no quantitative analyst but if i were to flip a coin 10 times, 6 tails in a row has a lower chance of occurring?

Either way, I never know how many stocks I'm going to win, and if I do win, I never know how much I'm going to make. I will never know how many positions I'm going to lose in the next 10 trades I take. I could lose all 10 trades but if I don't mange my position according to my current capital base, I could lose all my capital and never live to fight another day.

All I can control is risk management, executing my trades properly, ensuring my R/Rs are at it's highest, doing proper analysis on a stock to gain conviction etc. Cant tell the future of a stock price even with all the indicators in the world, can only tell if you have high probability.

Enjoy your trading journey

 

[Triathlete]

Sorry it was my mistake for not really articulating my point properly. What I was thinking was something like 50% is break even, <50% is loss and >50% is gain. Should have just used <0% is loss >0% is gain, derp. I would aim to keep the average > 0% but thats a no brainer.

I guess the difficult part is when you have gotten 6/10 losses - sure the last 4 might be wins but you cant manage or predict that accurately at the time, only your risk. In that regard, since you can't tell what percentage you are going to win in the future, even though you could still win those last 4/10 and come out on top, your risk management might not allow as much investment if at the time you have 6/10 losses as opposed to 3 wins 3 losses. And since the amount you invest is affected, you might not gain as much as you would have if you won those before your losses. Essentially what I'm getting at here is that the order in which you win/lose can change the result based on your risk management even if the percentage gains for those wins and losses were fixed and independent of when you invested.

If you are going to be a successful trader the two figures you need to know are:

1. Win / Loss ratio
2. Profit / Loss ratio
These two figures combined will determine your overall profitability...

 

[Init]

If you are going to be a successful trader the two figures you need to know are:

1. Win / Loss ratio
2. Profit / Loss ratio
These two figures combined will determine your overall profitability...

Sorry, I'm not entirely sure what that document is showing, the formulas havent carried across (if there were any). Is it saying the higher your win percentage, the lower your probable losing streak is? I thought that went without saying. Am I missing something else here.

 

[Quant]

I think the point being made is that 2 systems with same expectancy , lets say one with 40% trade success rate and one with 60% trade success rate , the system with 60% success will have lower risk of ruin and a smoother equity curve , the lower the % the higher the probability of consecutive losses

a system with a 50% drawdown needs a 100% return to get back to scratch

 

[tech/a]

Personally if I had a string of 30 losses
In a row my drawdown would be approx 18%
Of trading capital. Which I compound.
Many " Losses " are Break evens.

While my position sizing on a trade maybe at a risk of 2-4%
My reality governed by my ratcheting of initial stops is an average of .6%

Often have 5-8 in a row as a string of losses.

 

[peter2]

To the OP. You must have a money and downside risk management system as part of your trading plan so that you can survive the journey. These results are from a short term trading thread that mainly uses break-outs of horizontal resistance setups. These results are in chronological order with the number of consecutive losses at the bottom.

If you started with 7 losses in a row. What would you think about break-out trading? Would you continue trading?

 

[Init]

To the OP. You must have a money and downside risk management system as part of your trading plan so that you can survive the journey. These results are from a short term trading thread that mainly uses break-outs of horizontal resistance setups. These results are in chronological order with the number of consecutive losses at the bottom.

If you started with 7 losses in a row. What would you think about break-out trading? Would you continue trading?

View attachment 71048

Thanks, that graph is very informative. Honestly, if I lost 7 times in a row at the moment, I would err more on the side of inexperience, and so I should. However, in a more practical issue, I have a smaller amount of money I am willing to invest at the moment so I'm afraid that too many consecutive losses would put me in a position where I have too small an amount to invest and things such as brokerage fees become substantial. Currently with commsec, that's about $20 for brokerage and I'm fine with that but I need to invest over a certain amount or at least expect a certain return just to offset the 40$ buy/sell.

I think more importantly as well, is that each loss you have you can justify why you lost. I would feel more suspicious of my ability if I struggled to justify trends which went in a different direction that I thought, even in hindsight. A big part is improvement as well so I would want some way to show that I am meeting that as well.

 

[tech/a]

So don't use cash
Learn to trade using a demo account.
The biggest barrier to budding business
People is under capitalisation

 

[Init]

So don't use cash
Learn to trade using a demo account.
The biggest barrier to budding business
People is under capitalisation

I understand why you say that but there is also a practical issue.

That graph above shows, what I assume is, a decent trader's win/loss history. If that is indicative of a "good result" and is the result I hope to achieve through practice with fake money, then I still have to suffer potentially 7 losses at the beginning. What I am saying is that even as an experienced trader, it seems like there is a minimum amount of cash you need to be able to see through the down times knowing that your experience can bring you wins later on.

 

[tech/a]

Exactly

The only way your going to deminish risk is being in front of a screen while you trade. Down to the levels I get.
So do your apprenticeship without cost .