Trading breakouts

Discussion in 'Strategy Development' started by gifropan, Jan 12, 2010.

  1. Trading breakouts seems to be a popular method to trade and is quite often written about. However, there are very few detail examples cited on the subject. I have managed to define the problem as follows, and by no means do I claim the following list to be complete.

    1. How do you define a trading range. Is it defined as a collection of a number of bars (how many bars) of nearly equal range, or a few market swings, in the time frame used, of nearly equal size?

    2) Once a trading range is established, by how much should the top or the bottom of the range be violated to constitute a breakout? A number of ticks or a percentage of the width of the range are options I am researching into.

    3) Last, but not least, once a trade has been triggered where would one logically choose to put the stop. The opposite side of the trading range? The middle of the trading range or...

    Any ideas would be most welcomed.
  2. 1) Instead of focusing on sideways-channeling markets, look for uptrending or downrending channeling markets.
    2) You can look for prior high and low prices where the market has turned previously and also where a large quantity of stop-orders are likely to be placed that can fuel a breakout to new price extremes on the chart.
    3) Protective stop-orders generally are placed at the location of the original breakout, as long as it's not too far away from your entry price. If you miss a breakout, this is also the "safest" place to attempt to get in on the breakout if there is a re-test of the original breakout price. :cool:
  3. Interesting. If I understand you correctly you are suggesting buying the breakout out of the upper trend line of an up trending channel and selling the breakout out of the lower trend line in a down trend channel. Have I understood you correctly?
  4. Breakout trading usually aims to capture the larger moves (although not always). Many breakouts are 'false', so you'll need to send a high number of soldiers into battle before one reaches the hill.

    Try this method using dailies - if price exceeds highest high for last 10 days, buy, or if prices breaks lowest low for 10 days, then sell.

    I'd recommend a vol based stop, so place it 1 or 2 ATR away and see how you get on.

    You'll need to backtest this thoroughly over different markets.. depending on the time frame you use and the number of bars, different markets vary in response to this technique.

    One final thought.. there's a psychological element here in that you're always paying the high or selling the low, which at the time can seem like the wrong thing to do. It needs discipline to follow this method, and the win ratio can be low..
  5. I used to focus on break outs, and what you need to understand is that its a counter trend method. Your basically betting that the upside or downside momentum has shifted, and your trying to catch a bottom/ top more-or-less.

    I got faked out on many breakouts. I'd go long on the break, price would go up a little, then reverse and make a new leg down, or test the lows again.

    In fact I'd be willing to bet that a lot of breakout traders became fib traders because they started to notice that price would bounce before moving higher/lower, and so they waited for a 50% retrace or move before taking the trade. I'm one of those fib traders :)

    Make sure you understand that going into this.

  6. Yes. :)
  7. TGpop


    much better to buy before the breakout, or after on a pullback
  8. But how would you know which direction the market is going to go. I thought the whole idea of the breakout is that you go in the direction of the breakout.
  9. We use the ways of the Force my son.
    #10     Jan 12, 2010