In today’s article we highlight a simple method for finding breakout trades for your self-managed super fund (SMSF) and how you can produce stellar returns with a minimum of fuss.
The ASX 200 market has traded sideways to slightly positive since the start of August and the uptrend which began in early July remains intact as we climb the “wall of worry”. The Federal election will be held tomorrow and many traders are expecting the market to run higher. However investors have been expecting a decisive Coalition victory for the past six weeks, so the election result may already be priced into the market.
As an investor you need your money to be working for you, so you should be aware of how to spot stocks that are about to break out of a period of accumulation.
These breakouts can often be sharp, as the buyers have built up energy in the accumulation phase and jump on board when the breakout is triggered. The more successful trades occur in the same direction of the underlying trend of the stock and preferably the overall market.
Bollinger Bands are a highly regarded tool for identifying values and volatility in a stock price. The Bollinger Bands are plotted two standard deviations away from a simple moving average and according to Bollinger, the bands should contain 88%-89% of the price action, which makes a move outside the bands significant. The standard Bollinger Bands reflect direction with the 20-period SMA and volatility with the upper/lower bands, and therefore can be used to determine if prices are relatively high or low.
A method for identifying a change in the momentum of a stock price is the Rate of Change (ROC) indicator – a momentum indicator which measures the speed at which a stock price changes over a specific period of time.
These indicators are available in all editions of the d2mxIRESS software, including The Bourse, Market Analyser, Virtual Trader Pro and PTP 5000.
Breakout Finder Method
The Breakout Finder method has been designed to offer you a simple strategy for identifying stocks that are about to break out of a period of accumulation. It can be defined as a scan in the d2mxIRESS software and has produced stellar results, by simply running once a week.
To set up the scan, go to the Analyser Wizard tool in the d2mxIRESS software (under the D2MX Trade Tools menu). The settings you need are as shown below:
[click to enlarge] CHART 1: Defining the parameters of the Breakout Finder Scan.
There are two filters on the Breakout Finder scan:
1) Rate of Change (ROC) averaged over the past 21 days has crossed from negative to positive.
2) Stock Price has crossed the Upper Bollinger Band (BBand).
Plus the scan is run over the ASX100 list of stocks and could even be extended to the ASX200.
Breakout Finder Trade Results
We have compiled the results of this strategy over the past month. We used the ASX100 trading universe because it provides a simple fundamental filter for the stocks.
CHART 2: Breakout Finder trade results.
The Breakout Finder scan was run once a week (on Mondays) and a trade was entered into on the next day above the high of the trigger day (you will note Wesfarmers did not meet that entry criteria).
There were 10 trades set up: one trade did not trigger and all the rest made money. The trades often take a while to develop and if you are holding the Alumina and Caltex positions today, you would be in losing trades, but your average returns would still be 4.9% (without any leverage).
To give you an idea of some of the trade setups refer to the Carsales.com and Lend Lease charts below.
CHART 3: Carsales.com Breakout Finder trade
CHART 4: Lend Lease Breakout Finder trade
Steady returns can be made if you can identify a breakout from an accumulation period. These breakouts can often be sharp and the more successful trades occur in the same direction of the underlying trend of the stock and preferably the overall market.
The Breakout Finder system can quite easily be utilised by investors who are managing their self-managed super funds, as it takes around ten minutes a week to identify the stock(s) that are ready to breakout. Utilise our D2MX conditional order system to enter and manage the trade.
The secret to managing your SMSF is consistency, yield, time and the power of compounding!!
We here at D2MX Advisory can assist you with taking action to invest consistently and we have strategies designed specifically to generate consistent returns, that are scalable, and can boost the yield on your portfolio. There are a number of investment opportunities setting up right now, that you could potentially profit from, so contact us at call 1300 610 024 or email email@example.com.
For investment ideas and recommendations on how to trade in this market, sign up for a free trial of the D2MX Daily Trading Report, which provides a daily serving of insightful market analysis from the D2MX Advisory team, including:
• Trade ideas and strategies
• Dividend enhancement strategies
• Market scans to watch
• International market analysis, and
• Highlights from the S&P/ASX 200
To request an obligation-free trial, call 1300 610 024 or email firstname.lastname@example.org.
Investment Adviser – D2MX Trading
Also in this series:
Part 1: Boosting Dividend Yield in Your Self-Managed Super Fund (SMSF)
Part 2: Compounding in Your Self-Managed Super Fund
Part 3: Post-Election Investment Opportunities
This report was prepared by Michael Hevern. It represents the views and opinions of the author. It is not intended for use by any third party, without the approval of Michael Hevern. While this report is based on information from sources which are considered reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect my judgment at this date and are subject to change. Contracting Hevern Pty Ltd is a Corporate Authorised Representative No. 408868 of D2MX Pty Limited ABN 98 113 959 596, AFSL No. 297950 (D2MX), and Michael Hevern has been appointed as an Authorised Representative of Contracting Hevern Pty Ltd. Opinions, conclusions and other information expressed in this report are not given or endorsed by D2MX, unless otherwise indicated. The information contained in this Report is General Advice only, as the information or advice given does not take into account your particular objectives, financial situation or needs.
Disclaimer: Using leverage to invest can be a two edged sword, as it can magnify your returns when the stock price rises, but will in turn magnify the losses if the trade does not perform as expected.