2012 I 09
Mr Achim Mautz has been working in asset management for more than
13 years, specialising in swing and day trading in recent years. Two years ago, he launched the stock trading club “RatgeberGeld”. He is also editor-in-chief of two stock-market newsletters, the “Investor Alert” and “Mojo Trades”, the latter being due to start publication in autumn.
Contact: email@example.com; www.ratgebergeld.at
Get the Best Possible Risk/Reward Ratio
Breakout Trading –
Done To Perfection
The base and break strategy is a very efficient and successful instrument in day trading and can be used very easily. This strategy is one of the approaches with the highest risk/reward ratio (RRR) in the entire world of trading. This article describes how the strategy works, which parameters must be met, and how entry and exit can ideally be timed. www.tradersonline-mag.com 48
s t r at e g i e s
2012 I 09
F1) Optimal Setup for Amarin ä The base and break strategy is a pure day-trading strategy in which the buys and subsequent sales are made within a trading day. Of course, everyone is free to extend this strategy as a swing trade, and to only time the base and break strategy for the entries. A
15-minute chart is used for the setup itself and only one indicator is necessary to deliver both the signal for the buy and the signal for the trailing stop. This is the nine-period exponential moving average or EMA(9) for short.
1. Ideally, there is already a strong rise before we see a base (or orderly consolidation) in the chart. That increase may materialise on the same day, but may also have happened on the previous day. There are no precise definitions here of how high this rise must be in the run-up. It is enough for the rise to be visible and consequently for the EMA(9) to be in a “rising phase” mode. This is extremely important.
2. Secondly, it is necessary for us to be able to observe a base. This is actually nothing more than a sideways movement in which prices consolidate for a while
“to catch their breath” for the next movement of air. The base usually lasts between five and ten candles, which means an average of 75 to 150 minutes. The longer the base, the stronger the subsequent movement and also the probability of a positive final result. So more candles mean fewer false signals.
3. The third important factor is that the rising EMA(9) causes prices in the base, i.e. in the consolidation phase, to be pressed against the resistance line of the base and nearly squashed, figuratively speaking. Something similar happens when you step on a balloon which will then be compressed only to bounce up subsequently with a great deal of energy. As a rule, the base resembles an ascending triangle. In exceptional cases, however, it may also
The Amarin (AMRN) chart nicely shows the parameters necessary for a base and break trade. 1) Strong initial growth and rising
EMA(9), 2) forming a base, 3) compression of prices between EMA and the resistance line, 4) breakout. Source: www.tc2000.com
F2) Extremely high RRR at Rosetta Genomics
At Rosetta Genomics (ROSG), a base and break trade at only around 2.5 per cent distance to the stop was possible even though the stock had already risen 20 per cent on that day – to be followed by another 40 per cent later. It can also be seen clearly that if the price were to fall below the EMA(9) in the interim, the remaining part of the trade should not be smoothed immediately – but only when the 15-minute candle actually closes below the EMA. Source: www.tc2000.com
s t r at e g i e s
2012 I 09
be a descending triangle with the former triangle to be preferred.
4. After prices are so compressed that there is almost no air left between the EMA(9) and the resistance of the base, there is a high degree of probability of the breakout occurring, the so-called “break”. This, in turn, is then the buy signal, too.
Assessment of the Setup