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How do YOU enter breakouts?
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How do YOU enter breakouts?

  #1 (permalink)
Learn to swim
Salt Lake City, Utah
 
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How do YOU enter breakouts?

It has been said and written that breakouts usually fail. However, if this were true all the time price would never go anywhere. In the midst of a breakout there is usually not enough information to determine if it will be successful. How do you handle this? Many times I see,"trade the pullback" but by this time a lot of ground has typically been covered.

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  #3 (permalink)
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Breakouts often fail when you enter at the wrong time....

A breakout trade requires that

- price is stuck in a consolidation
- volatility is low and you expect volatility to rise

For example the famous opening range breakout feeds on the conviction that volatility will rise, once the session is open. The squeeze trade detects that price is stuck in a consolidation by comparing the standard deviation to the average true range over a period of N bars.

Both the opening range out trade and the squeeze trade cannot exactly predict to which side the breakout will actually occur. This sometimes depends on scheduled news, in other cases you will need to wait for the failure on one side to get the opposite scenario validated. It is important to consider to reverse a breakout trade if it fails to one side. It might be firing off the opposite side, provided that volatility stays high enough to fuel the move.

The simple Donchian Channel breakout trades as used by the Turtles are probably history, as that type of trade has attracted to many predators - called Turtle Soup, etc. - which made it impossible.

I still believe that it is possible to trade intraday breakouts, provided that you know

- at which time of the day there is a higher probability for a breakout
- what price move can be considered large enough for confirming that a breakout had happened

Breakout trades are low probability trades and should therefore be only be taken with a high reward to risk ratio (for example R-Multiple > 3 or 4).

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SammyD View Post
It has been said and written that breakouts usually fail. However, if this were true all the time price would never go anywhere. In the midst of a breakout there is usually not enough information to determine if it will be successful. How do you handle this? Many times I see,"trade the pullback" but by this time a lot of ground has typically been covered.

A lot of things have been said that are garbage. The less you listen to these baseless stats, the better.

It's best to already be positioned before a move and consolidation. Since a range must precede a breakout either way, look to buy the low and sell the high. Failing that, just from a guessing perspective, better to guess in the direction of the move than against it. The market tends to enjoy punishing faders.

FWIW, I do not use the word 'breakout' in my trading vocabulary. I just don't frame the market that way. Can you show some examples on a chart of what you call a breakout and show enough to the left for some context..?

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  #5 (permalink)
Learn to swim
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Good perspectives. I guess I'm never really positioned before volatility because I don't trade consolidating markets since I don't have an idea which way they will move. Also, the question about the term breakout is valid. I guess where I am having real trouble deciding to get in is when the market is moving quickly in one direction without much pullback such as yesterday's spike (see attachment). There really wasn't much of a pullback until much higher but as the spike is forming how would I know to get in? Also, from my perspective, spikes tend to create a worse risk to reward ratio as the stop loss must be placed much further back.

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How do YOU enter breakouts?-breakout-example.png  
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SammyD View Post
Good perspectives. I guess I'm never really positioned before volatility because I don't trade consolidating markets since I don't have an idea which way they will move. Also, the question about the term breakout is valid. I guess where I am having real trouble deciding to get in is when the market is moving quickly in one direction without much pullback such as yesterday's spike (see attachment). There really wasn't much of a pullback until much higher but as the spike is forming how would I know to get in? Also, from my perspective, spikes tend to create a worse risk to reward ratio as the stop loss must be placed much further back.

I have attached a smaller time frame view of the move up you are referencing. You just can't trade volatility like that with a 15 minute chart hoping for a pullback. So, if you want in on that, zoom way in. Otherwise, just stay out.

This was unexpected ECB-related news, and I'm not so sure I would have been positioned long anyway given the context. But you see the first pop (around 2145) and that's your real opportunity. Stops needn't be larger than 10 ticks or so with this type of trade. It pops, it consolidates, and then it will either continue, or come back down. It could have come back down and you would have stopped out, but it's a manageable loss. You are trading momentum, so don't give it room. If it pulls way back, then people will not pay up, and you will not have the move you are looking for.

But even though your best opportunity was early (of course), look at all the minor rotations on the way up. There's your opportunities if you choose to enter, but given the vertical nature of this, no reason to give it more than 10 or 12 ticks on any of them. For action like this, hold your breath and jump in, with quantified risk. Easier said than done, particularly in volatile situations. Just don't do anything stupid (like continuing to buy if it continues to pull back further and further) and it's all good.

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