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THE MARKET WHISPERER 29 7

Despite this high percentage, we should not conclude that buying at
breakouts is unwise. On the contrary: we need to understand the stock’s
behavior at the breakout point, anticipate when and why it may fail, and

manage it such that we are assured of our profit from the initial move, even

if the breakout eventually fails.

SMART Eighty percent of breakouts fail. Failure does not have to
MONEY lead to loss. We need to acknowledge the fact that most
breakouts fail, and instead learn how to take advantage of
them.

A false breakout is defined as a state in which the stock breaks the line
of resistance but returns to it and even below the breakout price at a later
stage. Does a false breakout necessarily lead to monetary loss? No! The
conclusion we should reach is that we must acknowledge the fact that most
breakouts are false, and learn how to take advantage of them even under
those circumstances. If you know how to handle a breakout, you can leave
the losses to less-experienced traders while you realize a comfortable
profit, even as the breakout is failing.

Consolidation

The more a stock consolidates prior to its breakout, the stronger the
breakout will generally be. A well-known snippet of wisdom states: the
longer the base - the higher into space.

Simply put, consolidation is the breakout’s energy source. The longer
the consolidation, the more attention people will pay to the stock; the
more people there are following the stock, the more people there will be
buying it at the breakout, thus increasing the chances of success. As the
consolidation lengthens, one can almost feel the steam building up and
waiting to burst through!

Planning and Execution

The entry point is simple and clear: we buy a stock that has gone up in
price one cent above the breakout formation.

Later, we will learn that it is occasionally possible to buy even before
the breakout if we are able to assess that there is a strong chance the
breakout will occur. Breakout buying is a very common method of trading,
but requires nerves of steel, the concentration of a fighter pilot, and high-
level technical skills.