Breakouts are one of the best patterns a trend following trader can look for. Focusing on breakouts forces one to look for uptrending stocks where the price is breaking through a prior high. This has two benefits: firstly, downtrending stage four stocks are avoided, and secondly, uptrending stocks are usually uptrending for a reason. You might know what that reason is, but you don’t need to know and can still join for the ride.

Nicolas Darvas, a trained economist turned full time touring dancer with his half-sister Julia, made over $2,000,000 in the stock market purely by using a simple system of what is now known as ‘Darvas boxes’. These were boxes drawn on by Darvas on a chart where the price broke through a resistance line – his system was a rudimentary breakout system and he would use volume as an indicator as a method of searching for insiders buying stocks. Indeed, if one looks back at the volume when takeovers are announced it’s not unusual for volumes to ramp up in the stock’s trading activities.

Nicolas’s book is worth a read, as despite being across the other side of the globe, he still traded sending telegrams to his brokers with his entries and stop orders. It shows the beauty of following a system and achieving wealth through consistency and doing the work – something many new traders are reluctant to do.

I trade breakouts myself (and show how to do so in my guide available from my website) and I also look at cup and handles. These are breakouts of a prior high where the price reaches a certain point, dips, and comes back to tag the resistance which forms the cup, then falls back less than the price did in the cup formation marking it as a handle. The idea is that the price then breaks through the resistance to fully form the cup and handle.

You can see an example here in William Hill, which is now up thrice since we looked at it as a long trade. We can see that the price marked the 50 EMA as resistance forming the cup, and then we see a shallow handle in the last two weeks of April, and the breakout of the 50 EMA.

2X-FxJAKbIRnu4dpEnPB1bT5eVNhYfK3_XKMxp8J

Cup and handles are nice because we can see strength in the stock.…

Unlock this Article with a 14 day free trial

or Unlock with your email

Already have an account?
Login here