Breaking Out

By Ulli G. Niemann

Previously I talked about the fact that the markets are stuck in a sideways pattern, from which they will eventually break out into new territory. That’s a guarantee—the unknown is when the breakout will occur and in which direction.

Supporting that view is W.D. Gann, considered by many professionals one of the greatest commodity traders ever. What do commodities and the financial markets have in common? While they are different animals, some of the most successful traders are employing a trend tracking/following method to identify and profit from price breakouts and subsequent trends.

Here’s what W.D. Gann said:

When a stock or commodity advances into new territory or to prices it has not reached for months or years, it shows that the force of driving power is working in that direction. It is the same principle as any other force which has been restrained and then breaks out.

Water may be held back by a dam, but if it breaks through the dam, you would know that it would continue downward until it reaches another dam, or some obstruction or resistance which would stop it. Therefore, it is very important to watch old levels of stocks or commodities. The longer the time that elapses between the breaking into new territory, the greater the move you can expect because the accumulative energy over a long period will naturally produce larger movements than if it only accumulated during a short period of time.

While this goes along with my experience, it is also true that not every breakout turns into a major new trend. It is therefore critical to employ the use of sell stops to keep losses to a minimum so you will be around to participate in the big trend whenever it occurs.

Let me make it absolutely clear. Losses and whipsaws are part of investing; the key is to keep them manageable. However, there is one way to avoid them altogether: Don’t invest in the market.

Original article here.

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