I'm working on a breakout system, and need some advice from experienced traders on stop order placement. The main problem I'm trying to solve now is to avoid getting whipsawed as far as I can. By getting whipsawed, I mean my stop order gets triggered, I go long/short (to open) X number of contracts, but the price retraces and my stop loss order gets triggered, and this happens multiple times a day. Ideally I want to place stops where the price either shoots through my stop order price and keeps going in the same direction, or if it triggers my stop order and retraces, I get stopped out and that's it. What I don't want, is my stop order to open gets triggered, price retraces and I get stopped out, stop order gets triggered again, price retraces and I get stopped out again, and this happens repeatedly. What methods can I use to select stop order levels so I don't get whipsawed? If I were to look at say support and resistance levels, or at volume of contracts traded at certain prices, what would be a good place to place my stop orders? Are there any good books or resources that deal with solving this kind of problem in detail out there? Thanks.
i'm going to assume this isn't a joke (maybe not a good assumption)...there is no way to avoid whipsaws period the end. by definition if you could every trade would be the start of a trend and would result in a profit. whipsaws are a cost of doing business for trend traders. maybe covel wants to chime in here since he's the resident expert on tf but op is looking for holy grail which only exists in indiana jones movies. not trying to be harsh just save op time looking for something that isn't there and in the process overoptimize a perfectly good tf system.
Define "breakout". Best is to illustrate an example on a chart. Are you sure that you are really trading breakouts or random wiggles. I have not experienced such a problem with stops when done properly.
I personally don't like using a stop for a breakout entry. In fact I don't generally like entering on the initial break at all. I'd rather enter the first test of the S/R level in question AFTER it's significantly broken through.
I'm not looking for a holy grail. I'm just looking for an intelligent way to minimize the chances of being whipsawed to death. I mean, there has to be a stupid way to do this, and a smart way. I'm asking advice on how to do it the smart way. For e.g. I might choose to place a stop order a few points below a known strong support level on the assumption that a lot of people are going to jump on and enter trades when the support is broken. So that's one example of what I'm looking for. Just common sense, intelligent ideas and advice on the best place to place the stop order.
Hence you might want to show what you categorize as breakout. Perhaps you are doing something fundamentally wrong, which is why the breakout which you see as one actually isn't. As said, I trade them all the time and put a stop at the nearest peak/trough and never experience the whipsaws you are describing.
Yeah, something wrong here. If a breakout fails lots of times then it's not a breakout. You need to post examples to get concrete answers.
I only trade breakouts on instruments that have a history of strong breakouts (i.e. CL, currency futures like 6E, and high priced highly liquid momentum stocks like AAPL). Do the homework for the instrument(s) you trade, determining what kind of patterns lead to the strongest breakouts, the deepest retrace that can occur that still maintains the validity of the breakout, and the kind of price action that throws a big red warning flag and says "Get out!" The best strategy is to get positioned ahead of the breakout, but if you're a pure breakout trader then you have to have statistics to back up the setups and your trade management of them. When I trade CL breakouts, I use a $100/contract stop loss and if the breakout doesn't carry price at least X ticks out of the gate, I bail on it close to break even. Although I bail on a few that would've been fine if the initial stop loss was left in place, that's OK, because the best breakouts don't look back and offer a great reward. If the instrument(s) you trade tends to retrace a lot after initial breakouts, then look for second entries only. ES is notorious for breaking out, retracing far enough to shake out all the weak hands, then continuing in the direction of the breakout for real.