the hAndbook of technIcAl AnAlysIsWith the breakout entry approach, the trader normally initiates an entry once
price breaches either the upper band, lower band, or central value with a closing
violation, that is, price closes outside the bands or beyond the central value. For
breakout entries, the bands should be adjusted for a greater sensitivity so they will
be more conducive for breakouts. A balance must be struck between trying to gen-
erate more breakouts with a more sensitive setting and avoiding being whipsawed
with a wave of false breakouts.
The trader’s exact point of entry will depend on the type of price filter employed,
which may be any of the following (see Chapter 5 for more on price filtering):
■ (^) Event‐Based Measure: Closing price or barrier retest after the breakout
■ (^) Absolute Measure: Fixed price excursion
■ (^) Relative Measure: Percentage of breakout price
■ (^) Volatility Measure: Multiples of average true range or standard deviation
■ (^) Time Filters: Duration of N closed bars
■ (^) Algorithmic Filters: Specific sequence of closed bars or sequence of new peaks
or troughs
For upside breakouts, stoplosses may be positioned:
■ (^) Just below the upper band
■ (^) Just below the lower band
■ (^) Just below the central value
■ (^) Just below a previous trough
For downside breakouts, stoplosses may be positioned:
■ (^) Just above the upper band
■ (^) Just above the lower band
■ (^) Just above the central value
■ (^) Just below a previous peak
Figure 12.7 Bandwidth Bias on the Daily Continuous Chart of Light Crude Oil.
Courtesy of Stockcharts.com