Buy High, Sell Higher - Trading the Breakout

After working in the industry for over a decade and committing endless hours in trying to figure out how many is made through investing I was able to identify four methods that actually works. I am assuming most of us knows them as well. One who can master any one of it can become the market guru and own the market. But let me warn you, for decades people have tried to master these rules. They have spent years to learn and implement them, from industry veterans to math wizards but have yet to perfect them. So here we go,

• Method #1: Buy Low Sell High


• Method #2: Sell High, Buy Low


• Method #3: Buy Higher, Sell Higher


• Method #4: Sell Lower, Buy Lower

You don’t have to master all four. Just any one will help you become a very successful trader. This article will focus on method #3, Buy Higher, Sell Higher. The article tries to analyze the 52-week (250 days) breakout buy for a 30-days and 90-days holding period. If you follow the reports by financial media outlets and social media then the terms like “break out trades” or “52 week high” should sound very familiar. This article attempts to further analyze these terms and see if any money that can be made by trading these breakouts.

The Set up:

Just to keep it simple we will analyze the top 10 companies in S&P 500 Index by market capitalization. This analysis is not limited to only large companies, it can also be applied to domestic and international stocks, mid-cap and small cap stocks, ETF’s and Mutual Funds. In fact, anything that trades publicly can be included in the universe. For the sake of keeping the concept at sight we will focus only on the top 10 stocks in S&P 500 Index by market cap.

The universe constituents are scanned for their N-periods breakout, the trades are opened on the next trading day of the breakout and closed at the end of N-holding period. Trading and commission costs are ignored for illustration purpose.

Statistics:

1. Number of trades: For the period 12/31/2000 through 3/31/2021.


2. Average Holding Period Returns: Average holding period realized returns.


3. Win Ratio: % of positive realized returns over the total number of trades.


4. Expected Value of the trade: (win rate * mean positive returns) + (1-win rate) * mean negative returns.


5. Relative Performance: Mean return of SPY ETF used as a benchmark for the same holding period as the stock.

250 days lookback period, 30 days holding period

	# Trades	Win Ratio	Mean Return	SPY ETF	Expected Value
AAPL	59	69.49%	5.57%	0.98%	5.56%
AMZN	54	61.11%	3.73%	0.42%	5.21%
BRK-B	44	65.91%	1.96%	0.94%	2.25%
FB	29	68.97%	3.09%	2.12%	3.16%
GOOGL	42	57.14%	1.16%	0.55%	3.08%
JNJ	48	62.5%	0.51%	-0.04%	1.03%
JPM	44	61.36%	0.24%	0.06%	1.28%
MSFT	51	64.71%	1.53%	0.86%	2.06%
V	49	71.43%	2.28%	1.41%	2.07%
WMT	40	45.0%	0.63%	1.84%	2.58%

Few things worth noting are that except Walmart (WMT) every other stock had greater than 50% chance to be in the money with technology names like AAPL, AMZN, FB and GOOGL leading the charts in terms of win rate and average realized returns. Also, all the names outperformed the S&P 500 Index ETF (SPY) for the same holding period.

It makes sense to trade only when the expected value of the trade is positive and higher the better. The expected value of all trades executed by trading the breakout over the 250-day lookback period and holding it for 30 days has a positive expected value.

250 days lookback period, 90 days holding period

	# Trades	Win Ratio	Mean Return	SPY ETF	Expected Value
AAPL	27	74.07%%	15.77%	2.62%	15.77%
AMZN	29	72.41%	13.74%	3.34%	14.31%
BRK-B	23	60.87%	3.13%	2.25%	5.25%
FB	14	71.43%	6.27%	4.31%	6.75%
GOOGL	21	57.14%	3.81%	2.61%	7.47%
JNJ	25	76.0%	2.85%	1.03%	2.59%
JPM	22	50.0%	-0.06%	1.62%	5.51%
MSFT	26	73.08%	4.54%	2.03%	4.72%
V	23	73.91%	7.27%	3.21%	7.3%
WMT	22	45.45%	0.74%	1.92%	5.63%

The table above is for 250-days lookback and 90-days holding period. Once the stock breaks out it gathers attention from trend and momentum traders, short covering by the short sellers and investors sitting on the sidelines with cash. Longer the holding period more market participants are participating in the rally. With a 90-days holding period the win rate, mean and relative return (to SPY) and expected value metrics have significantly improved relative to a 30-days holding.

180 days lookback period, 30 days holding period

	# Trades	Win Ratio	Mean Return	SPY ETF	Expected Value
AAPL	67	70.15%	5.6%	1.32%	5.59%
AMZN	58	62.07%	3.46%	0.44%	4.92%
BRK-B	51	58.82%	1.3%	0.91%	2.2%
FB	31	64.52%	2.32%	1.78%	3.07%
GOOGL	45	62.22%	2.14%	0.5%	3.39%
JNJ	52	59.62%	0.59%	0.06%	1.36%
JPM	49	65.31%	0.93%	0.38%	1.59%
MSFT	55	65.45%	1.32%	0.99%	1.83%
V	50	72.0%	2.2%	1.43%	2.01%
WMT	44	45.45%	0.63%	1.64%	2.62%

Shortening the lookback window from 250-days to 180-days and a holding period of 30-days resulted in similar metrics as with 250-days lookback period. The table above is for 180-days lookback window and 30-days holding period. Expected values is still positive for all the stocks reinforcing the idea that trading the breakouts can yield consistent positive returns.

180 days lookback period, 90 days holding period

	# Trades	Win Ratio	Mean Return	SPY ETF	Expected Value
AAPL	32	71.88%	13.53%	2.76%	13.52%
AMZN	31	70.97%	11.94%	3.26%	12.24%
BRK-B	28	60.71%	2.24%	2.09%	3.88%
FB	15	66.67%	5.48%	4.02%	6.41%
GOOGL	23	60.87%	6.41%	3.64%	8.97%
JNJ	27	77.78%	3.37%	1.44%	2.53%
JPM	25	56.0%	1.35%	1.97%	5.39%
MSFT	27	77.78%	5.81%	3.64%	4.76%
V	24	75.0%	7.0%	3.42%	6.45%
WMT	23	56.52%	2.55%	3.49%	4.96%

Higher returns are realized for a 180-days lookback and 90-days holding period. Breakout tends to attracts attention of the traders, financial media outlets and retail investors among others, thus longer holding period gives more time for the trade to participate in the rally.

Conclusion

Everything above looks very promising so does that mean we should just trade every stock that breaks out? The answer to which requires diving little deeper into this idea and testing for its robustness and other risk measures. Since the conceptual framework is laid out and initial results shows that consistent returns can be earned trading breakouts it's worth paying attention to stocks closer to their breakout range. One may use this as a screen to build a tradeable universe, trade options or construct a breakout portfolio. With proper risk management breakouts can be a strategy for active traders.

It may be worthwhile to perform the same analysis for different universe like mid cap, small cap and international stocks and test them for robustness of this strategy. Another idea is to test buying the 52-week low and holding it for 30 to 90-days. Do we have any trading alpha there? I will leave it open for the continuation of this article.