Secrets of the BreakAway Investor

“A Trifecta of Breakout Indicators forms the pillars of my system,” says William Colburn, Chief Strategist for Break Away Investor. “My trading approach simple. Often, the less complicated the system, the easier it is to realize profits.”

The bread and butter of the Breakout Signal is the moving average. Moving averages make it easier to spot trends, which is especially helpful in volatile markets. They also form the building blocks for many other technical indicators.

And that’s the key.

Sometimes we all need to get back to basics, to what is important. The building blocks almost always show the greatest strength.

A simple moving average is formed by computing the average price of a security over a number of days, months, quarters, etc. While it is possible to create moving averages from the open, the high, and the low data points, most moving averages are based on the closing price.

Back to Basics: Chart the Way to Big Gains

In its most simple form, a security’s price can be doing only one of three things: trending up, trending down or trading in a range.

An uptrend is established when a stock forms a series of higher highs and higher lows. A downtrend is established when a stock hits a series of lower lows and lower highs. And a trading range is established when a security cannot establish a clear uptrend or downtrend.

If a stock is caught in a trading range, the uptrend is started when the upper boundary of the range is broken. A downtrend begins when the lower boundary is broken.

Once a security has been established a trend, the next task is to select the number of moving average periods and the type of moving average. The number of periods used in a moving average will vary according to the security’s volatility and trends.

Profits Come from “Perspective Adjustment”

Short-term traders may look for evidence of two- to three-week trends with a 21-day moving average, while longer-term investors may look for evidence of three- to four-month trends with a 40-week moving average. For our purposes, we’ll stick primarily to the easier to grasp 20-, 50-, and 200-day moving averages. This, of course, doesn’t mean that we won’t delve into others, but these three will do for starters.

Now, just crossing the 50-day moving average isn’t a rare feat. A stock has to cross the 50 and stay over it for a decent amount of time before we can call it a reliable trend.

Usually some form of company news or earnings announcement is at the root of specific price moves. (Sometimes not, though. Movements can almost appear to be spontaneous.)

Here is where our Breakout Signal comes in to pick and choose the cream of the crop. In short, we’re screening for those stocks that have broken away from their previous trends to crack their moving averages.