Mastering Jeff Cooper's Shakeout + 3 Strategy

Meta Description: A deep explore Jeff Cooper's Shakeout + 3 strategy. Learn the specific entry, exit, and risk management rules for this effective swing trading setup.

Category: swing-pullbacks

Slug: mastering-jeff-cooper-shakeout-plus-3-strategy

Introduction

Jeff Cooper, a renowned trader and author, introduced a effective entry technique known as the "Shakeout + 3" strategy. This setup is designed to identify and capitalize on a specific type of market behavior: a false breakdown followed by a rapid recovery. It's a variation of the classic shakeout pattern, but with a more defined set of rules that provide a clear, actionable trading plan. The "+3" in the name refers to the three-day timeframe that Cooper uses to qualify the setup. This strategy is particularly effective in identifying early entry opportunities in strong stocks that are poised for a significant move higher. This article will provide a detailed breakdown of Jeff Cooper's Shakeout + 3 strategy, covering the precise rules for entry, exit, and risk management.

Entry Rules

Cooper's entry rules are designed to be precise and objective, removing much of the guesswork from the trading process. Here's a step-by-step guide to identifying a valid Shakeout + 3 setup:

1. The Shakeout: The setup begins with a "shakeout," which is a move below a prior swing low. This initial move is designed to trigger the stop-loss orders of retail traders and create a sense of fear in the market.

2. The Recovery: The key to the setup is the subsequent recovery. The stock must immediately reverse and close back above the violated swing low. This indicates that the shakeout was a false move and that the buyers are back in control.

3. The "+3" Confirmation: The "+3" refers to the three-day confirmation period. After the recovery, the stock must trade for three consecutive days without violating the low of the shakeout day. This confirms that the support has held and that the stock is likely to move higher.

4. Entry Trigger: The entry is triggered when the stock breaks above the high of the third day of the confirmation period. This is the signal that the stock is ready to resume its uptrend.

Exit Rules

Cooper's exit rules are just as important as his entry rules. Here are his recommended exit strategies:

1. Price Projection: Cooper uses a price projection technique to identify potential profit targets. He measures the distance from the low of the shakeout to the breakout point and then adds that distance to the breakout point to get a minimum price target.

2. Trailing Stop: Cooper is also a proponent of using a trailing stop to let his profits run. He often uses a moving average or a trendline to trail his stop.

Profit Targets

Using Cooper's price projection technique, you can set a clear profit target for the trade. For example, if the low of the shakeout is $50 and the breakout point is $55, the distance is $5. The minimum price target would be $60 ($55 + $5).

Stop Loss Placement

Cooper refers to the stop loss level as the "line in the sand." This is the level at which the trade setup is invalidated. For the Shakeout + 3 setup, the stop loss should be placed just below the low of the shakeout day. If the stock trades below this level, the setup is no longer valid and you should exit the trade.

Position Sizing

Cooper adjusts his position size based on the quality of the setup. For a high-quality setup with all the right ingredients, he may risk up to 2% of his trading capital. For a lower-quality setup, he may risk only 0.5%.

Risk Management

Cooper is a stickler for risk management. Here are some of his key risk management principles:

• Never risk more than you can afford to lose.
• Always use a stop loss.
• Know your exit point before you enter a trade.
• Never add to a losing position.

Trade Management

Cooper's trade management techniques are designed to maximize profits and minimize losses. Here are some of his key principles:

• The "3-Day" Rule: If a stock doesn't move in your favor within three days of entering the trade, you should consider exiting the position. This is because a strong stock should move quickly in your favor.
• Let Your Profits Run: Cooper is a big believer in letting his profits run. He uses a trailing stop to ride the trend for as long as possible.

Psychology

Trading the Shakeout + 3 strategy requires a specific mindset. Here are some of the psychological factors to consider:

• Patience: You need to have the patience to wait for the setup to form perfectly. Don't jump the gun and enter the trade too early.
• Discipline: You need to have the discipline to follow the rules of the setup, even when your emotions are telling you to do something else.
• Conviction: You need to have the conviction to buy a stock that has just had a shakeout. This can be difficult, but it's essential for success with this strategy.