How to Make Money from "Failed Breakouts"

I love being wrong.

I love it when the market gives me a big, fat middle finger—when all of my hard work and analysis fails, and a play blows up in my face.

Yeah, I know you might think I’ve lost my marbles for saying something so crazy. But you’re about to see why you’ll love being wrong, too…

Sure, nobody wants to be wrong. Most folks can’t handle it. They’d rather sit through The Interview – twice— than admit they’re wrong. That’s just how people are wired. Our pride gets in the way.

But if you can learn to set your precious little ego aside and embrace the unpredictable markets, I promise you’ll make more money that you ever thought was possible—all while being dead wrong! That’s because losing trades can sometimes turn into big winners—if you know what to do. And very few people do. But after today, you will…

So, what’s the secret to turn losing trades into winners?

Failed breakouts…

Failed breakouts occur when a stock makes a breakout move to new highs, but quickly stalls out. The bastard then tanks, triggers stop-losses up the wazoo, and rips away any hopes traders had for a profit.

It’s tricky business. Most traders get demolished by the false breakout. It’s like shooting for the sucker pin in golf. It looks so damn good at first. And then…

But if you know how to handle failed breakouts, you can turn your frown upside down.

So here’s what you do if you’re caught on the long side of a false breakout…

1. Cut and run. When you hit your trailing stop, hit the eject button. Never, ever, let your emotions get in the way.

Failed breakouts happen because traders close out positions, which starts a chain reaction that leads to a price implosion. First the day traders get out. Then swing traders make a run for it. And after the stock retreats back into its trading range, many longer-term traders scramble for the exits. There are plenty of these traders and investors trapped on the long side, so this usually leads to a swift move lower. In our example, you can see how fast the stock plummets.

Only the stubborn longs are left holding the hot potato, the poor souls who couldn’t admit they got the trade wrong. Don’t be one of them.

That’s why you must obey your stop loss if you’re trading a failed breakout on the long side. No matter what your gut says. If you don’t, you might as well stop reading right now and go make yourself a late breakfast. Or an early drink… You might need one if you don’t follow these instructions on your next losing trade.

2.Wait for the breakdown. Then sell short.

If the stock fails at support (like in our example above) it’s time to sell it short. That’s right, you sell short. And that’s the key to making money this trade – you make it on the way down. It’s that simple. Hey, if you can’t make it on the way up…

And the best part? This strategy works in the opposite direction, too. I’m talking about if you shorted a stock that starts heading higher. Just reverse your thinking. Check out what it looks like in this simplified chart:

Hedge Fund pros love setups like these because they can lead to fast, predictable gains.

“When we recognize that this scenario is potentially playing out, the risk vs. reward becomes very much skewed in our favor,” explains my friend and Eagle Bay Capital founder J.C. Parets. “The entry point is the minute that price gets back below former overhead supply, in the case of a failed breakout. Our stop loss is just above that area. So if prices do break back above resistance then all bets are off and prices are likely going a lot higher.”

So the next time you see a disappointing breakout (or breakdown, for that matter) remember that you have a shot at booking substantial gains if you simply turn the trade on it’s head—and do exactly the opposite of what every other panicked trader out there is doing.

And that’s how you turn a losing trade into a winning one.

There, you just learned a pro’s trick few people know exists. And it could put a lot of cash in your pocket this year if you use it.

Regards,

Greg Guenthner

for The Daily Reckoning

P.S. So the next time you see a disappointing breakout (or breakdown, for that matter) remember that you have a shot at booking substantial gains if you simply turn the trade on its head. If you want to cash in on the biggest profits this market has to offer, sign up for my Rude Awakening e-letter, for FREE, right here. Stop missing out. Click here now to sign up for FREE.