False breakouts : Higher success rate than breakouts?

Discussion in 'Strategy Development' started by DanielEQQIS, Feb 27, 2019.

  1. Hello! I’m Daniel and demo trading for almost 6 months. Trading got my attention about 1 year ago, and since then, I’m permanently learning and absorbing new information from everywhere I can (reading articles, forums and watching Youtube videos).

    One video caught my attention, about false breakouts. My main struggle with trading was identifying good breakouts, but failed constantly. After I saw that video, I realized that valid breakouts appear only 15% of time, and the rest ones are false breakouts. So, why chasing a pattern that has a 15% chance of developing, when I can trade a false breakout, a more common pattern?

    Now, instead of trading a breakout, I’m trying to go the other way around. I’m waiting for a support or resistance to be broken, I wait for the price to retrace within the range, and go the other way around. I traded on demo in the last week on Dax and Dow Jones Index and so far I have a positive balance, using a 1:1 risk/reward ratio (here’s a link to the video if anyone is interested : )

    I will continue to demo this approach. What do you think; could false breakouts be more profitable than normal ones? I don’t have much experience, but this method really makes me open a real account.
  2. Problem is, works in a ranging environment but when market is trending breakouts will work and your strategy will probably fall apart, but that being said..... market ranges very often so it could work
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  3. Quiet1


    The point is that false breakouts and real breakouts occur in such a way as to not in themselves provide any edge. This is another way of saying that mean-reversion and range-expansion happen with near random/non-stable patterns.

    One suggestion: only take false-down-breakout entries when going long (on equity indexes) and true-up-breakout entries on the same. You are effectively harvesting the equity risk premium (ie buy-and-hold) but with less risk due to less time in the market.
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  4. carrer


    The only way to know this is to backtest (or forward test-the long way). From the video I am assuming that TP=SL. Hence, you need a win ratio of more than 50% in order to make money.

    From my experience, it will only be profitable for a period of time, say 6 months. Or it only works on certain instruments. Once it becomes unprofitable, all you have to do is reverse the trades to be profitable again.

    The only problem is you don't know when it's nature will reverse and for how long.
  5. %% Really depends on the market, Daniel E.
    Some collecting dividends on SPY, or QQQ,comission free ETFs, good year to date %%-they really don't care if '' ad for smart money goes short'' LOL. As they say in Chicago'' better be a petrified bull/uptrend than a penniless bear''
    But sideways slop/bear, no dividend, negative year to date, Mr Musk gets fined $40 million, by SEC, many would not want to buy that even if it paid a dividend or positive YTD, + it does NOT LOL-LOL. But If they kick mr Musk out; it may do OK??

    As far as DOW, I seldom track/record that one;
    I use SDOW, don't know if its liquid enough for daytrading??But SDOW pays a dividend of 1.7%Like Tom Gentile says, look for lots of green or lost of red[trends]
  6. Handle123


    Most of my entries are based on failures and half go with original trend, systems wait generally for masses(retail) to get into some trade based on either charting or TA, then it waits for those who have huge volume to push it to trigger tight stops, then entry, but I am mainly a scalper, so am not going for large moves, but some will on few runners.

    It does help much by knowing what the "mean" swings are for uptrend/downtrend for past several days, this way you can expect possible failures at extremes of the swing, i.e. uptrend/a failure when expected such as left shoulder of H&S, many might wait for the retracement forming the left shoulder, price goes higher and based on mean average of swing would be the top and short breakout of highest low, either most will see another retracement/it is short live as right shoulder forms and once it starts to drop of breakout/most unaware trend has now changed and it be much longer for indicators to catch up-another failure. Or price fails to form right shoulder forms occasionally quick drop off ensues.

    Studying TA helps to know where masses jump on board of some signal then wait getting in where their protective stops located.
  7. DanielEQQIS,

    Good questions,

    The quality of a breakout trade depends on 1. Level price is breaking 2. Timeframe of chart 3. Risk management after breakout.

    A failed breakout after several attempts does make more logical sense, then one attempt to break out.

    All the above depends on context or stuff that has happen left of the potential breakout.

    In addition, once you start back testing and forward testing, you will see the high probability of a failed breakout versus a successful breakout.

    I like to have multiple reasons to take a trade, not just one.

    Regarding back testing. You will have to decide what timeframe to backtest on, what years or months to back test.

    And most importantly when to exit.
    Last edited: Feb 27, 2019
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  8. slugar


    I've actually found the more times a level is tested the weaker support or resistance becomes so if a level is tested several times the chance of a breakout being successful increases!
  9. vinc


    ''I've actually found the more times a level is tested the weaker support or resistance becomes so if a level is tested several times the chance of a breakout being successful increases!''
    ground breaking,man..especially with this quantifier 'several'..you meaan like - five?? :)
    what I found out is that after SEVERAL black candles there is usually a white one..and it's true! I swear goddamit , it's TRUE!
    themickey likes this.
  10. slugar


    Really! What happened to the days on et when you could give your opinion and try to contribute without some smart a$$ being stupid and making fun of you! Maybe before you make fun of people you could learn how to use the quote!
    #10     Feb 28, 2019
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