Trading Strategies – breakout trading

Tactics, based on breakdown, can actually be considered a form of short-term trading. In other words, trader not concerned with any long-term forecasts or analyses, but thinks only about the direct movement of prices.

Systems on breakout volatility based on assumption, what if the market moved a certain percentage from the previous price level, then the chances favor some continuation of this movement. It can last only one day or even go a little further than the entry point within one day., however, this is enough for a profitable trade. The trader should be happy with, that the market allowed him to take profit.

Breakdown systems always initiate a trade in the direction of an existing market movement. Entry is usually through a buy stop or a sell stop. That fragment of the continuation of the movement, on which we play, develops following the impulse (on which we enter or before which we enter). Besides, there is another principle of price behavior, which creates trading opportunities. It lies in the fact, that markets tend to alternate periods of equilibrium (balance between buying and selling) and imbalances. An imbalance between buying and selling causes the trading range to expand – the market is looking for a new level of equilibrium, and that's that, which enables us to enter the trade.

There are various ways to create short-term systems, working on the principle of penetration. Various systems, based on expanding the trading range, give approximately the same results. Therefore, then, which method you choose depends only on your personal preference.

When designing the system, you can place stop entries depending on the opening price or the closing price of the previous day.. These stop entries can be a function of the previous day's trading range or a specific percentage of the average trading range. 2-10 day duration. Mechanical outputs can range from using fixed objective levels to using the time function., for example opening or closing the next day. Most of these systems work well with very wide stops..

Another variety system, breakthrough-based, are channel breakdown systems, for example, buying at the maximum of the last 7 days when using the 7-day channel, or a maximum of 2 days when using a 2-day channel. Other breakdown systems can be shape-based, generated on the graphs, breakouts of trend lines, upward or downward breakouts of regression and other channels or various kinds of function variations due to changes in the trading range.

Trade short-term trading systems, based on breakdowns, can be a very valuable exercise in improving your trading.

Firstly, she teaches you to do that, what to do is hard to buy highs and sell lows in a fast moving market. This sounds very unnatural to many people..

Secondly, she always requires, in case of entering a trend, the presence of a well-defined stop, based on risk management. The absence of such a stop is the most common mistake among traders..

Thirdly, she teaches stockists the importance of the final stage in case of entering a deal, since many breakdown systems give better results when rolling over positions to the next day. AND, finally, it is a great tool for improving the performance of traders. Majority breakdown systems extremely active compared to long-term, following trends. A trader can place orders in a large number of markets. Having a mechanically defined entry point is often the necessary means, which helps the trader to overcome the fear of receiving a signal. Orders are placed in advance, and the market then automatically rolls over them and throws the trader into the trade when the stop signal level is broken.

Even if the trader prefers to trade, relying solely on your experience, mechanical system trade, volatility-based breakdown, can be invaluable. She must, at least, reduce the trader's uncertainty in certain types of price movements in the market, especially if he prefers to enter on corrections against the dominant trend. It cannot help with a true trending day., however emphasizes its strength.

For And against Trade breakdown systems:

– Like most tactics, systems, based on volatility breakdown, will hit the jackpot in highly volatile or fleeing markets, and give intermittent results with sideways fluctuations or volume reductions. They are among the most profitable trading systems, and will remain so in the long term. They are long lasting and resistant, however, it can fail when placing a very large number of orders in relation to the market. However, whatever you decide, found the "Holy Grail" of trading systems, it is necessary to remember the following:

– Entrances can be very painful, especially when the market is in a runaway state. Good breakouts then don't roll back, which can be used to login. You are either on horseback or not. If you understand, that a good break gives rise to a trend day, which ends near a high or low, then it is not so difficult to enter. It is best to place stops, opening positions, beforehand, when the market is calm.

– Sometimes the market gaps just outside of your signal. This often gives good trades in the future.. However, sometimes this situation leads to the most painful losses.. Large gaps indicate the need to enter a trade, however, they also provide additional volatility for exits. If you had to step out, and after that a new signal arrived in the opposite direction - this trade is in the opposite direction, usually, gives profit, significantly exceeding the initial losses.

– Losses are certainly painful, however, they are completely inevitable when trading breakdown systems. Many times traders buy highs and sell lows. Must have faith in statistics for trading systems of this type. Systems need to be tested on data three years long, better in 10.

Reinforcement of the base system, Based on Breakthrough volatility:

Adding filters can sometimes strengthen the system. Examples of possible filters: indicators, determining whether the market is trending or not; market seasonality; day of week; the degree of volatility change, already present on the market. Periods of low volatility can be identified by narrowing the trading range, low ADX or statistical indicators, such as, for example, standard deviation.

The system might then look something like this:

1. Initial volatility conditions;

2. Stop buy or stop sell are calculated, based on the opening price plus minus a percentage of the previous day's trading range;

3. Feet, risk-based, activated after opening positions;

4. Exit strategy.

Variables, which can be used to create simple volatility breakout systems:

– Period – the breakthrough is determined by the function of the previous day or, for example, previous 10-day period;

– Trading range – the average trading range for the period is used, maximal, minimal or general;

– Interest – what percentage of the range to use? Maybe, for example, use 120% from the total range of the previous 3 days;

– Basis – the trading range function is added to the close of the previous day or the open of the current one. The same function can be added to the low or high of the previous day or the previous period., for example 10 days.

The larger the percentage used, the more will be the number of winning trades, however, overall profitability may decrease due to reduced system sensitivity - therefore, it is important to find a balance between profitability and risk that suits you.

Example of initial conditions: Enter a trade only if the day was preceded by the smallest one in the last 7 days value of the trading range. Or, enter the market only if in the last 5 days a new 20-day high or low was made. Before, how to finally add a filter to the system, it is necessary to evaluate how much it raises system performance.

Exit strategies:

– Time based (closing yesterday, opening of today's);

– First profitable discovery;

– Objective or objective level (high low of the previous day);

– trailing stop (shifted moving average, parabolic, 2-xday low high).

Risk:

Controlled risk – the amount of risk, which can be predetermined and incorporated into money management.

Money management types:

1. Fixed profit;

2. Price levels (for example, low high of a bar).

Uncontrollable risk:

1. Carrying over of positions to the next day (opening risk). You cannot close positions, when the market is not working, Therefore, you are a potential victim of a breakup., which may happen due to any news.

2. Risk of slippage. Rapid market changes or thin volatile market may be the reason, that a trader enters a trade at prices significantly worse, than those, which he counted on.

All in all, the effectiveness of any system is highly dependent on the capture of several large wins. You shouldn't afford to miss a good trade., who can make monthly profit.

Several Comments on the use of these or other systems:

1. Build confidence in the system first, trading on paper.

2. First make sure, that you can trade your system mechanically for profit, before trying to move away from her.

3. Record your real profit at the end of the day to compare with that, which a mechanical system would give.

4. Measure the performance of the system with a sufficient number of measurements for example, 100 trades or a certain number of weeks. Don't let one bad week or one bad trade discourage you.

5. Control more outputs, rather than filter inputs. It is impossible to predict in advance, which trade will be profitable. Any missed entry could be very profitable, therefore, no input signals can be skipped. Outputs control means two things: first, determine under what conditions you can delay the exit for another hour or two. AND, second, more experience-dependent, learn to determine under what conditions the trade does not work and you can exit even before, how did the stop work?.

6. All systems have their own subtle nuances and change over time. Get a notebook, where will you enter your observations and characteristic figures, which you noticed.

7. If slippage seems significant, this often means a good triangle breakout or consolidation phase. Remember: something must move the market a sufficient distance, to make the breakthrough come true.

A source: Fortrader magazine.

okbm(“http://nysetrader.net/torgovlya-na-proboj/”,”Breakout trading”)