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In a message dated 98-01-19 13:13:11 EST, TProeber@xxxxxxxxxx writes:
<< Sometimes (about 50% of the time), there will be a fake in the opposite
direction of the eventual true breakout. How to filter ? . >>
Hi Tim,
Most technicians call this pattern a rectangle. The upper line
identifies resistance, the bottom support. The best filter to eliminate false
breakouts is the volume. If volume increases as price approaches the upper
line, the breakout will be likely to the up side and vice versa to the bottom
line. A valid breakout is usually confirmed by an increase in volume of 1/3
to 1/2 higher than the average volume of the 5 previous days.
A few general rules: Rectangles tend to be wider in uptrends,
narrower in downtrends. The longer the rectangle the more significant the
breakout. Breakouts on weekley charts are often very important since they
represent a major increase in bullish or bearish sentiment.
To estimate the likely minimum extent of the breakout simply mesure
the hight of the two lines. Also it is a good idea to check a longer time
frame than the one you are trading for confirmation of market direction. For
example if you identify the breakout on a daily chart, check the weekley chart
for the trend.
Place stops just inside the rectangle, a true breakout may return
to the line but will not cross it. If the price does return to the line (but
not cross it) this pulback is a strong, low-risk entry signal in the direction
of the breakout with a stop just inside the rectangle.
This system certanly qualifies as simple and efective.
Good luck and good trading,
Ray Raffurty
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