Author: ExhaleTrading

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Jeff Cooper’s Expansion Breakout

Today I want to present the Expansion Breakout setup by Jeff Cooper, published in his book “Hit and Run Trading”.

Cooper describes in his book that when trading breakouts he often found himself on the wrong side of the trade. Therefore he took a closer look at the winning trades and noticed that a winning breakout trade was often accompanied by a daily trading range that was the largest of the last nine days.

To make use of this finding he created the following setup.

For long trades:

1.) Today’s close must be a 50-day high (in the original text it is “a two-month calendar high”; since a calendar month has about 25 trading days I translated this to a 50 day high to make it programmable).

2.) Today’s trading range must be equal or larger then the largest daily range of the previous 9 trading days.

3.)  On the following day only, buy 1 pip above today’s high

4.) Initial maximum risk (stop loss) is 1 pip under yesterday’s close.

For short trades:

1.) Today’s close must be a 50-day low.

2.)  Today’s trading range must be equal or larger then the largest daily range of the previous 9 trading days.

3.)  On the following day only, sell short 1 pip below today’s low.

4.) Initial maximum risk (stop loss) is 1 pip over yesterday’s close.

 

Let’s look at two example trades. I ran the screener on all stocks from the NYSE and this is what I got:

We got several hits. The screener is not differentiating between long and short signals, I chose instead to show how many days have past since the signal was given (PRT only allows to show one criterium).

As example for a long setup I chose Ally financials. You see a chart right below.

On 29th September a Expansion Breakout for a longsetup is forming. The indicator draws a green arrow below the break out candle. It also gives the entry level for the next day (green line) and the stop loss (red line).

On October 2nd (the next trading day) the close penetrates the green line and we are long. 8 days later price retests the region of our entry but prices do not close below our stop loss. At October 25th another break out candle is forming and makes the trade profitable. It is not unusual for this setup that in a strong trend several breakouts follow each other in the direction of the trend. Usually the first breakout of a new trend gives the best results.

Let’s look at a second example. This time we are looking at Dynegy Inc.

On August 4th a short setup is forming. The indicator draws a read arrow above the breakout candle. Besides it gives us the entry for the next day (green line) and the stop loss for the trade (red line). The following day price closes below the green entry line and we are short.

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The Holy Grail

The first setup I want to present was published by Linda Raschke in her book Street Smart. The setup is by no means THE holy grail but well it wasn’t me who named it.

It is a pretty simple setup that speculates on the continuation of a strong trend after a pullback.

Linda Raschke explains:

“When prices make new highs(lows) in a strong trend, you should always buy(sell) the first pullback. The Holy Grail is a precise method we use to measure when to enter a position after a retracement. Once we are in this trade, we are looking for a continuation of the previous trend.

One of the two outcomes typically follows. The retest will either fail at the previous high/low in which case a small profit can usually be made. In the second scenario, a whole new continuation leg begins. At the very least, one is offered a very low-risk entry point with several options for managing the exit thereafter.

The rules for long trades are (short trades are reversed):

1.) A 14-period ADX must initially be greater then 30 and rising. This will identify a strongly trending market.

2.) Look for a retracement in price to the 20-period exponential moving average (EMA20). Usually the price retracement will be accompanied by a turndown in the ADX.

3.) When price touches the EMA20 put a buy stop above the high of the previous bar.

4.) Once filled, enter a protective stop at the newly formed swing low. Trail the stop as profits accrue and look to exit at the most recent swing high. If you think the market may continue its move, you might exit part of the position at the most recent swing high and tighten stops on the balance.

5.) If stopped out, re-enter this trade by placing a new buy stop at the original entry price.

6.) After a successful trade, the ADX must once again turn up above 30 before another retracement to the moving average can be traded.”

I used the original rules  (except rule 5, I think it is better to wait for a new, fresh setup to form than re-entering a stopped out trade) above and programmed a screener that searches for the setup and an indicator to visualize both entry price and stop loss.

And this is what the result looks like. I screened all stocks from the NYSE for the setup on a daily timeframe.

 

We got several hits. In the rightmost column which is named “Holy grail setup” you find either a “1” for long setups or a “2” for short setups.

Let’s have a look at two examples. First we take Mc Donalds as an example for a long trade.

 

Here you see the setup forming in the beginning of june with a pullback to the EMA20 (blue line). This happens while the 14-period ADX is above 30 (to see the ADX please activate the builtin ADX-indicator of the platform). 4 days later a long trade is triggered when price exceeds the light green line. The stop loss for the trade is the red line.

Now let’s have a look at a second example. This time it is a short setup and it is IBM we are looking at.

 

In the middle of march the setup forms in a downtrend with a pullback to the EMA20 (blue line) while the 14-period ADX is above 30. Only 3 days later a short trade is triggered when price crosses under the light green line. The stop loss for this trade is again the red line.