The simplest way to trade a shakeout
The Shakeout set up it is.
"The easist person for you to fool, is yourself."
Hello mate,
Now that you have an idea of what a shakeout is (see last week’s article). In this article, I will talk to you about:
The simplest way to trade the shakeout.
Recent examples.
Can you scan for this setup?
Disclaimer: The setup I am discussing today has a lot of discretionary elements to it. This is solely based on my personal observation. I have not back-tested or forward-tested it. Therefore, please take it with a pinch of salt. It’s based more on Feels. Hopefully, someday, I will test the setup. I will be sure to let you know.
Before we begin. What is a shakeout? Read more below:
The Shakeout setup:
The best shakeout will have the following 2 characteristics:
A long tail:
Generally more than 4% of the close price (longer the better). But not all long-tailed candles are shakeouts. It has to undercut an important pivot and close inside it, for it to be a shakeout.
Tail undercuts important pivot:
This pivot can be a swing low, a key moving average (21ema, 50sma, 200sma), a Gap boundary, a VWAP level, or important support.
Additional Confluences:
My personal observation has been that a shakeout has a higher chance of success if it undercuts 1 or both of (on top of undercutting a key pivot):
Supertrend 10/2 or 10/3
Lower Bollinger band
ENTRY: Above the shakeout day high (or the previous day's high), or the Tight area where the shakeout has occurred (see the discretion here?)
Alternatively, once there is a shakeout event, you can add the stock onto your watchlist and enter when its breaking out of the range/contraction/base.
How do you confirm this breakout?
I have been fiddling with using indicators as a confirmation signal (article on this soon), and I like Bollinger Bands breakout the most.
See examples of this below.
STOPLOSS: 0.5% below the shakeout day candle, or the pivot, or the lower bollinger band (see the discretion, LOL! Sorry).
TARGET: As a swing trading setup, take partial profits at 2R (twice the risk, R. e.g. if SL is 8%, at 16% sell some quantities. It can be 1/4th, 1/3rd or 1/2th quantities), and trail the stop loss of the remaining quantities to the buy price immediately. Trail using a suitable indicator as the trade moves in your favor further.
Recent Examples:
Borosil Renewables, Mankind Pharma & Wabag:
How did I pick these particular names?
Well, these were the last 3 names that I posted last on my Twitter.
Shakeout examples setting up this week with the Bollinger band style entry:
Harsha Engineering
Emudra.
Vesivus India
Can you scan for this setup?
YES!
You can easily write a scanner for a long-tailed candle (or the bullish tweezer, or the moring star pattern) that has undercut the super trend and or the lower Bollinger band (I share my scanner hits with my HPA members. HPA details are below).
Out of the handful of names, go through manually and see if any of these are actually a shakeout.
Okay, that was all I had to share about the Shakeout setup. Like I said, its a work in progress. i am still making observation about shakeout and will have more to say in the future.
If you are also thinking on similar lines, feel free to share with me. Cool!
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I will see you in the next one. Till then,
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~ Homma
Some Peak Scanners for you:
Pullback to 10/21 ma: https://chartink.com/screener/copy-shpb1021
VCP (long-term timeframe): https://chartink.com/screener/shvcp-epic-modified