We often hear that we should buy after a certain point is broken. So what is the breakthrough buying method? Why do we need to buy after a breakthrough? How to determine this point? And how to buy after a breakthrough?

The breakout buying method focuses on the support and resistance levels of the market and buys when the price breaks through these levels. This breakthrough may indicate an upward trend in stock prices. Following the trend, traders pursue profits by buying at precise times, which belongs to the trend trading method. In the future, the counter-trend trading method will also be introduced. Each different method is suitable for different traders and different situations, and each has its own advantages.

In the breakout buying method, there is a famous Wall Street trader named Jesse Livermore. The Livermore trading method is a set of trading strategies proposed by him. This trading rule emphasizes the importance of timing, patience, market behavior observation and risk management. Breakout buying is the core part of Livermore's trading rules. According to the screening of market trend direction, opportunities and entry points, stable profits can be achieved through strict screening of opportunities and entry points. Simply put, it is to enter the market when breaking through the "key point".

The following figure shows the BTC1H chart, with a time range from June 9 to June 25, 2023. On June 17, the price broke through the previous high point (one of the rising pressure points), and the price continued to rise. The key point here is the previous pressure point.

breakthrough

After that, the breakout part of the breakout buying method was greatly enriched:

1. Donchian Channel Breakout Rule: Buy when the price breaks through the highest point in the past 20 days, and sell short when the price falls below the lowest point in the past 20 days. In "Turtle Trading Rules", this breakout method is also matched with the trend combination filter: only go long when the 50-day moving average is above the 300-day moving average, and go short when the 50-day moving average is below the 300-day moving average. For details, please refer to "Turtle Trading Rules", which is a book that all traders should read carefully and repeatedly. It is also this book that makes us realize that trading is caused by the bias of traders' psychology and the importance of risk management. 2. Cup and Handle Trading Rule: William O'Neill Cup and Handle Trading (Cup and Handle Pattern) is a technical analysis method commonly used in the stock and foreign exchange markets. This pattern is famous for its typical "U" shaped cup and downhill handle shape. The cup and handle pattern is divided into two parts: the U cup (Cup) and the handle (Handle). The U cup part of the pattern presents a U-shaped curve, which is manifested as the stock price falling after reaching a certain high point, and then gradually recovering to the vicinity of the original high point, forming a flat-bottomed round or U-shaped structure. After the U-shaped cup is formed, the stock price may experience a downward trend, which is called the handle. The handle usually appears as a downward sloping trend line, which may be a stage of consolidation or a small decline. The following figure is a BTC daily chart, with a time span from 2022/11/01 to 2023/02/20. Arrows 1, 2, and 3 form a U-cup pattern. After the U-shaped cup is formed, arrow 4 goes downhill for a short distance, which is the handle. Buying when the handle is formed may be a signal. Depending on your risk tolerance, the entry signal may appear when the resistance line of the cup or handle is broken. (The example in the figure may not bring the best returns, but is just to introduce the pattern)

3. Box Theory: Nicholas Darvas Box Theory is a technical analysis method that uses the highs and lows of prices and trading volume to find entry, exit, and stop loss points. The formation of the box is when the price is in a stalemate, buyers support the stock price to make it rise to a high point, and sellers exert pressure to make it fall. As a result, buyers and sellers hover between the support and resistance lines, forming a "box". The box theory first identifies the support and resistance levels of the stock price within a specific range. These levels form the bottom and top of the box, and the price fluctuates within this range. When the price breaks through the top resistance line of the box, this usually indicates that strong support has turned into resistance, which may trigger an upward trend, so it can be regarded as a buy signal. Conversely, when the price breaks through the bottom support line of the box, it may trigger a downward trend, so it can be regarded as a sell signal. As shown in the figure below, it is a BTC4H chart with a time span of 2023/06/22 to 2023/07/30. Between the two white lines, the price has been oscillating, and when it falls below the support level, it can be regarded as a sell signal.

 

Why buy after a breakout?

Someone will definitely ask, with the breakout trading method, the price has risen so much before a possible buy signal appears, isn't it missing a lot? Besides, the price is so high, buying now is chasing high, this trading method is not reliable. To answer this question, in the examples given above, I believe that careful readers will find that the time span of each chart is different, that is, there will be small trends in the big trend, and there will be small boxes in the big box. In the oscillating process of oscillating rise or oscillating fall, it can also be regarded as a combination of multiple box structures with small time spans. Second, it is about a thinking mode. Trading is to consider problems from the perspective of probability, not to predict the future. Don't try to make predictions about the future, but judge the probability and stand on the side of high probability. Third, trading is different from investment. The essence of trading is to dance with risks and buy and sell at the right time; investment is to go hand in hand with value, buy when the value is underestimated, and sell when it is overestimated. For example, Buffett is an investor. The stocks he buys correspond to the company itself, including the company's management, products, services, markets, etc.; while ordinary traders are more concerned about the price of stocks when buying and selling stocks, not the company. Fourth, the advantage of trading comes from cognitive bias. One of the most common is the bias of trader psychology, such as the anchoring effect, which is specifically reflected in the "key points" in the "breakthrough", or the previous highs, lows, support and resistance levels. The anchoring effect refers to the tendency to rely on easily available information to judge price levels.

Breakout Points: Support and Resistance Explained

The following is a weekly chart of BTC, spanning from 2022/06/06 to 2023/07/24. I believe that many people saw the enthusiasm of many cryptocurrency media and retail investors on 2023/07/13, because the highest price of the day exceeded the highest point since 2022/06/06, $31,765, reaching $31,804. 31,765 or the "previous high" and some integer prices are the anchoring prices in the minds of many people, because it is visible at a glance and has a significant psychological impact on market participants, thus forming resistance or support levels. Most traders believe in the existence of resistance and support, which further strengthens support and resistance, forming a cycle. If many traders believe that once the price falls to a certain level, there will be a large number of buyers entering the market to take over, then they are more likely to believe that the price will inevitably rebound when it falls to this level. Vice versa. For example, in the figure below, BTC reached a price of $31,000 on April 14, 2023, and then began to fluctuate downward, so a psychological resistance level would be formed at $31,000. On June 15, 2023, a rebound began to form, and traders who entered the market to buy BTC during this period might think: "If the price exceeds $31,000, I will definitely sell." (Please note that long-term value investment is completely different from trading, and the traders mentioned here are all speculators who dance with risks). In the rising potential energy (the energy overflowed by traders can be compared to the potential energy in physics, which is often reflected in the upper or lower shadows of the candlesticks), the price will break through 31,000 and continue to rise, but due to the existence of resistance and psychological resistance, the price will gradually begin to test the breakthrough resistance multiple times. Once an effective breakthrough is formed, the probability of continuing the upward trend will be greatly increased, and the breakthrough trading method will be in full swing at this time.

Like many other trading theories, support and resistance are just a concept, not a golden rule. Prices may not necessarily rebound from previous highs or lows, but they tend to do so. Support and resistance are not specific numbers, but a range, which may be lower or higher. In addition, if a person adopts a counter-trend trading strategy, support and resistance will be the source of his advantage in trading. If the support and resistance levels hold, then you can sell high and buy low in this range. For example, in the figure below, the resistance level is around $31,500 and the support level is around $29,500. In this range, you can buy and sell repeatedly.

Why choose to trade at a breakout? Because the cost of trial and error is the lowest at this time, and the market is changing rapidly. A false breakout is the name for a failed breakout. As shown in the above figure, the new high of $31,804, which broke through the previous pressure points (such as $31,300), is very low in the trial and error cost of buying and selling at this time. When the price breaks through the resistance level, the resistance level will turn into a support level. Conversely, trend traders can sell stop losses when the price falls below $31,300 and mark it as a false breakout; counter-trend traders will think about when to buy in the price breakout rise, end the short order in hand, avoid more losses, or wait for the signal of a false breakout to form before trading against the trend to make a profit.

How to buy after a breakout?

Livermore's buying after a breakout has the following key points:

1. Analysis of support and resistance levels: Buy close to support levels and sell close to resistance levels to achieve the best trades.

2. Batch buying strategy: One of Livermore’s core principles is to buy 20% of the stock first. If the buying direction is wrong and the stock falls by 10%, the loss will be stopped immediately, and the loss is 2%. This method can effectively manage risks and avoid major losses.

3. Wait for a breakout: Avoid buying stocks in a downtrend, and instead wait for a breakout. Once a breakout occurs, adopt a strategy of buying in batches to follow the trend and optimize your trades.

4. Emotional management: Livermore's trading method is not only technical analysis, but also emotional management. He emphasizes calmness, patience, learning from failures, and constantly reviewing to better implement his batch buying strategy.

5. Pyramiding: This method involves buying in batches to take advantage of market momentum by increasing investments as prices rise.

First buy 20% as a base position;

If the trend reverses, stop loss immediately if it drops 10%;

If the trend remains unchanged, immediately add 20% when it rises by 10%;

If the price continues to rise by 10%, continue to increase the position by 20%;

It continued to rise and finally increased its position by 40%.

Once it falls below 10%, sell everything immediately.

This method can amplify profits during the rise while avoiding continued losses. At the same time, the stop loss can also be moved at various stages. Taking Tesla stock trading as an example, buy 20% at $100/share, and then the stock price continues to rise or has a correction and does not fall below the 10% stop loss level, that is, $90/share and then rises. According to Livermore's buying method, buy another 20% at $110/share. At this time, the stop loss can be moved to the range between the first and second purchase prices, such as $105/share. The next rising stage is similar, so that you can get a good profit even after the upward trend reverses.

The above is the buying method used by Livermore after the breakthrough. There is also a pyramid buying method in the bear market, buying more stocks downward to spread the risk. It is mainly used for long-term investment rather than trading. Choose a stock whose price is in a downward trend and plan to use the pyramid strategy to gradually buy stocks.

1. Phase 1: The current stock price is $100/share. The investor decides to buy 100 shares at this price, with a total investment of $10,000.

2. Second stage: The stock price drops to $90/share. According to the pyramid strategy, the investor buys more stocks at a lower price, so he buys another 150 shares, with a total investment of $13,500.

3. Stage 3: The stock price continues to fall to $80/share. The investor continues to follow the pyramid buying method and increases his position again, buying 200 shares, with a total investment of $16,000.

4. Risk and cost control: Pyramid buying helps spread risk and reduce average cost by gradually increasing investment as prices continue to fall. This approach helps protect investors from drastic price fluctuations and enables them to get better value when the market is down.

5. Be cautious when selling: When stock prices resume their upward trend, investors should be cautious when selling to ensure a good return on their investment.

Summarize

The above is an introduction to the breakout buying method and the Livermore trading method. The breakout buying method is a trend-following transaction that can help traders follow the trend, reduce losses, and gain profits. In addition, when trading, it is also necessary to use other indicators such as MACD, OBV, KDJ, etc.

Trading and investing have completely different logics, but whether it is trading or investing, you need to have risk management awareness. Before each transaction or investment, you need to make your own understanding and judgment and be responsible for your own actions and results.