The Throwback phenomenon
What Breakout Traders MUST read before improving their worst case scenario
One must step back to make the better leap - French Proverb
Have you been in a situation when you buy a breakout, only to see it pullback, stop you out and then go higher? Chances are you might have put your stop too tight but the damage goes not only to your account but also to the ego as well. Congratulations, you have met Mr.Throwback. Throwbacks are important to acknowledge since they happen about HALF of the time after a breakout!
A throwback occurs more than 50% of the time after a breakout.
A breakout advances +8% on average in 6 days.
A throwback is most likely to occur within 10 days of the breakout.
In 65% of the cases the price resumes upward in the direction of the breakout.
🟦Up days 🟪 Down Days
A few words…
A throwback occurs after an upward breakout when the price returns to the breakout price or base pattern within 30 days. Mark Minervini calls this behaviour “natural reaction” and William O’Neill calls it “natural correction”. In any case it refers to a normal fluctuation of the stock.
As the stock breakouts it advances in prices, however the buying slowly fades as shorter term holders bag in their profits. On average breakouts peak after 6 days to 8% advance. Afterwards they begins a roundtrip to the breakout point or right out to the base that occurs about 4 days. The total return trip takes about 10 days. From there there is 65% chance that the stock continues in the direction of the breakout and 35% it will fail and break lower. The section Throwback stats shows the probability of a Throwback when the breakout occurs from a different pattern.
As you see the setup where a throwback is likely to occur when we breakout from a rectangular top when a pullback occurs 64% of the time.
Strategy idea 💡
If you are a shorter term trader you can take half profits at +8% → the average level before a pullback and adjust your stop loss. For example you can move stop loss half way up TOWARDS the breakeven (e.g. from -6% to -3%) this way you can minimize damage if the pullback fails.
If you are a longer term trader, we have observed that breakouts tend to move on average +20-25% before forming another base setup. So this can be a higher target to aim for.
Additionally, there is a high probable technique that suggests how to buy on the pullback itself. I have covered such technique here: