Breakout and Pullback Risk/Reward

[pavilion103]

Simply the closer your stop is to the entry price the more stock youll buy.
Further away less stock.---thats all

As for waves its not that hard---do some reading and youll soon see them.

If the stop is that far away (12.9%) wouldn't that mean it would be a lower reward:risk ratio?
Do you feel this is only suitable towards the earlier stages of a move?

If there was a really good entry (from a technical point of view) towards the latter stages of a move which allowed a tightish stop loss so good reward:risk, would you consider taking it then?

Cheers

 

[sinner]

I am struggling to determine when to enter on the breakout and when to wait for the pullback. The below example is not the best one but just used to illustrate a point.

It is a potential short trade as it breaks through support. If I had entered on the green box (although there probably isn't enough info at this point) my entry would be 6.7% from initial stop loss. If I were to wait for confirmation the next day (purple box) entry would then by 12.9% from initial stop which looks too wide.

If I were to wait for confirmation and enter on the purple box bar then WHERE WOULD I PUT MY INITIAL STOP?

Once again, I know this is not the best example but I simply use it to pose the question. Where am I going wrong?

View attachment 42940

Considered placing your stoploss at the most recent minor swing high for shorts and most recent minor swing low for longs?

 

[pavilion103]

Considered placing your stoploss at the most recent minor swing high for shorts and most recent minor swing low for longs?

I am trying to identify these points and place stops accordingly. I think sometimes I am unsure just how much support/resistance I need when placing a stop.

I have also been placing some stops (not very often) at the high/low of control bars. I'm not sure if this is wise. I guess the key is to place the stops just under/above strong resistance/support areas, but just how much strength is needed I am not sure.

 

[sinner]

I am trying to identify these points and place stops accordingly. I think sometimes I am unsure just how much support/resistance I need when placing a stop.

I have also been placing some stops (not very often) at the high/low of control bars. I'm not sure if this is wise. I guess the key is to place the stops just under/above strong resistance/support areas, but just how much strength is needed I am not sure.

To me it seems like you are just moving for the sake of moving, without knowing what is going on at all.

I am not saying that in a disparaging way, but trying to give my honest opinion.

You seem to think buying and selling breakouts is a good idea. That is a fine premise (assuming you understand the mechanics of what is actually happening).

But at the same time, you seem to have no idea what exactly you expect from the breakout, and thus obviously displaying troubles about when your expectations are or could be wrong.

IMHO you have come too far in the dark, you need to go back to square 1 and turn the light on.

1. Setup.
2. Trigger.
3. Follow through.

Where are you in those steps? The title of the thread should help put you back on track. To me it seems like you haven't really got the setup figured yet.

As tech/a always likes to say "once you have the why" it all comes together.

 

[tech/a]

If the stop is that far away (12.9%) wouldn't that mean it would be a lower reward:risk ratio?
Do you feel this is only suitable towards the earlier stages of a move?

If there was a really good entry (from a technical point of view) towards the latter stages of a move which allowed a tightish stop loss so good reward:risk, would you consider taking it then?

Cheers

Yes in the short term.
again it is important to understand the concept of Risk Reward.
Its a figure which is calculated from CLOSED trades.
and EXPECTATION of profit isn't a positive expectancy---it might be your own but a positive expectancy is a positive R/R over a number of closed trades.
Dont get so hung up on super tight stops to increase the expectancy if it goes your way.

Sinner is in essence on the money.

I think sometime spent on the above topic will clear the cobwebs and get to the WHY.

Quickly
15 losses of 20c and one win of $10 gives a positive expectancy for that method over 16 trades.
Whats yours?

 

[pavilion103]

To me it seems like you are just moving for the sake of moving, without knowing what is going on at all.

I am not saying that in a disparaging way, but trying to give my honest opinion.

You seem to think buying and selling breakouts is a good idea. That is a fine premise (assuming you understand the mechanics of what is actually happening).

But at the same time, you seem to have no idea what exactly you expect from the breakout, and thus obviously displaying troubles about when your expectations are or could be wrong.

IMHO you have come too far in the dark, you need to go back to square 1 and turn the light on.

1. Setup.
2. Trigger.
3. Follow through.

Where are you in those steps? The title of the thread should help put you back on track. To me it seems like you haven't really got the setup figured yet.

As tech/a always likes to say "once you have the why" it all comes together.

Thanks for the detailed feedback. I have copied and pasted it. I know I am doing a lot wrong because I am not getting the desired results, so any feedback is like music to my ears. It takes me 1 step closer.

I want to make sure I follow.
This is basically what I'm doing at the moment:
- run the scan for breakout/potential breakout stocks
- draw in trendlines, support/resistance, patterns etc.
- wait for a break (which looks good based on the previous 3-5 days price and volume)
- either enter on the breakout or wait for confirmation (depending on the situation)
- try to trail it as it progresses (I have little idea where to trail it and am trailing it too tight)

You are 100% right. I have no idea what to expect from a trade. I do draw in a hypothetical profit target based on the size of the previous range etc. But in essence I do not know how much I expect a trade to move.

I haven't been able to generate many wins at all over 1.5-2R!!! I think the two problems are 1. Not trading with enough momentum 2. Not letting the trade run long enough. I think it is a combination of these.

From what I have said above what do you suggest I look into? I am prepared to do anything to get this right. I don't care how much work it takes.

 

[pavilion103]

Yes in the short term.
again it is important to understand the concept of Risk Reward.
Its a figure which is calculated from CLOSED trades.
and EXPECTATION of profit isn't a positive expectancy---it might be your own but a positive expectancy is a positive R/R over a number of closed trades.
Dont get so hung up on super tight stops to increase the expectancy if it goes your way.

Sinner is in essence on the money.

I think sometime spent on the above topic will clear the cobwebs and get to the WHY.

Quickly
15 losses of 20c and one win of $10 gives a positive expectancy for that method over 16 trades.
Whats yours?

Thanks Tech.
Yeh I understand the expectancy of a system.

I've only completed about 50 trades on my simulator.
My average win is only around $200 (1R)
and my average loss is around $170 (0.85R)
My accuracy, however is only around 35%
Which works out to an abismal expectancy of around -0.2

I love the analogy mentioned by Sinner about the light. I do feel at the moment like I am in the dark.

I am taking the steps mentioned in the above post. I cannot seem to identify high momentum trades which give me large R multiple wins.

 

[tech/a]

Thanks for the detailed feedback. I have copied and pasted it. I know I am doing a lot wrong because I am not getting the desired results, so any feedback is like music to my ears. It takes me 1 step closer.

I want to make sure I follow.
This is basically what I'm doing at the moment:
- run the scan for breakout/potential breakout stocks
- draw in trendlines, support/resistance, patterns etc.
- wait for a break (which looks good based on the previous 3-5 days price and volume)
- either enter on the breakout or wait for confirmation (depending on the situation)
- try to trail it as it progresses (I have little idea where to trail it and am trailing it too tight)

You are 100% right. I have no idea what to expect from a trade. I do draw in a hypothetical profit target based on the size of the previous range etc. But in essence I do not know how much I expect a trade to move.

I haven't been able to generate many wins at all over 1.5-2R!!! I think the two problems are 1. Not trading with enough momentum 2. Not letting the trade run long enough. I think it is a combination of these.

From what I have said above what do you suggest I look into? I am prepared to do anything to get this right. I don't care how much work it takes.

Your fighting an up hill battle.
Nothing much is trending so to expect breakouts to continue in the short term is un realistic.
If you have a look at where these breakouts are occuring in the life cycle of the chart youll find many are topping.
Thats ok but before they move even further into another cycle of trending they are likely to pull back and range.

Timing at the moment ---regardless what and how you trade---is pretty awfull.
If I get sometime tonight Ill chart up.

 

[sinner]

You are 100% right. I have no idea what to expect from a trade. I do draw in a hypothetical profit target based on the size of the previous range etc. But in essence I do not know how much I expect a trade to move.

To me it seems obvious that this is the crux of your issue.

You are still (IMHO) looking at it around the wrong way so let's remove ourselves from the current example and use something fresh to try and get the concept across.

----------------------------------------
In "Trading in the Zone" by Mark Douglas he gives an anecdote, of the floor trader for a large investment bank. He is a bit of a dinosaur, doesn't know anything about technical analysis at all. So he calls in one of the younger traders, for a briefing on technical analysis. The trader fires up his Soybeans futures chart, and draws a few lines, trendlines, support etc.

Then he says to the dinosaur, "Soybeans are a buy when they touch this line here, they'll bounce and go up to prior resistance from that level". The dinosaur looks at him funny and asks him if he is sure, but the young guy is sure, so they sit to watch the chart as the trading day develops.

About halfway through the day the Soybeans chart declines to intersect the trend line and looks like it is beginning to bounce. The young trader calls his own guy on the floor and puts an order in to buy a few Soybeans contracts.

At this point the dinosaur looks at the young guy funny again, and asks "are you sure that this is where it's gonna stop?" the young guy eagerly nods his head. "Technical analysis!" he says. The dinosaur picks up his phone to the trading floor, and says into the receiver "sell 1,000 front month Soybeans" then hangs up the phone.

A few seconds later as the Soybeans chart has crashed through the trendline, the young trader looks pale as he calls in to sell his contracts for a loss while the dinosaur calls in to cover his shorts for a much larger profit.
----------------------------------------

Now the moral of the story is not "technical analysis is for fools and big orders make it useless".

The moral of the story is about expectations.

Once you enter the trade, the outcome is not in your hands. On a trade by trade basis, the outcome is essentially random. It is only on a much larger scale of closed trades that the edge becomes apparent.

So by what you expect, I didn't mean, expect 3 for 1 every 1 risked. Or whatever.

Now we can go back to your example: you enter a long on a bullish breakout setup. It's bullish to you specifically because your testing shows that statistically, it is bullish.

Now, what are you expecting from this trade?

In terms of profit, it simply isn't known! Some dinosaur could come along and sell a billion dollars of the stock you just bought, or Goldman Sachs might be taking over the company. Anything is possible

But, there are expectancies you can define:

For example

"If I trigger a long from my bullish setup and the price falls back to the breakout level and continues lower to close below the nearest swing low I expect that the breakout has failed, and would like to exit at an N% loss."

"If I trigger a long from my bullish setup and after 5 days the price still hasn't retraced to my entry point, I expect the breakout has potential to mature into a real trend so I will move my stoploss to breakeven and let the trade run."

"If I trigger a long from my bullish setup and the next day it prints a bearish reversal bar, I expect a 2b setup is in play and exit for breakeven."

"If I trigger a long from my bullish setup and it retraced to the breakout level and then formed a bullish key reversal pattern I expect this to be a good place to attempt a pullback trade."

etcetera, etcetera.

Remember, I stated what I viewed is the problem: you don't know what you are expecting.

and I didn't mean, how many Rs worth of profit you expect! Some will be small winners, some will be small losers, most of these trades will net out to 0 against each other. Don't worry about that. Just try to stay in the game and as long as you know the answer to the why of your setup (why does your setup have the potential to hit home runs? Usually the answer for breakout setups is that they put you first in line for all the moves - you buy high to sell higher and sell low to cover lower), then you should have no issues executing it again and again looking to hit that home run which moves your equity curve up a notch.

 

[pavilion103]

To me it seems obvious that this is the crux of your issue.

You are still (IMHO) looking at it around the wrong way so let's remove ourselves from the current example and use something fresh to try and get the concept across.

----------------------------------------
In "Trading in the Zone" by Mark Douglas he gives an anecdote, of the floor trader for a large investment bank. He is a bit of a dinosaur, doesn't know anything about technical analysis at all. So he calls in one of the younger traders, for a briefing on technical analysis. The trader fires up his Soybeans futures chart, and draws a few lines, trendlines, support etc.

Then he says to the dinosaur, "Soybeans are a buy when they touch this line here, they'll bounce and go up to prior resistance from that level". The dinosaur looks at him funny and asks him if he is sure, but the young guy is sure, so they sit to watch the chart as the trading day develops.

About halfway through the day the Soybeans chart declines to intersect the trend line and looks like it is beginning to bounce. The young trader calls his own guy on the floor and puts an order in to buy a few Soybeans contracts.

At this point the dinosaur looks at the young guy funny again, and asks "are you sure that this is where it's gonna stop?" the young guy eagerly nods his head. "Technical analysis!" he says. The dinosaur picks up his phone to the trading floor, and says into the receiver "sell 1,000 front month Soybeans" then hangs up the phone.

A few seconds later as the Soybeans chart has crashed through the trendline, the young trader looks pale as he calls in to sell his contracts for a loss while the dinosaur calls in to cover his shorts for a much larger profit.
----------------------------------------

Now the moral of the story is not "technical analysis is for fools and big orders make it useless".

The moral of the story is about expectations.

Once you enter the trade, the outcome is not in your hands. On a trade by trade basis, the outcome is essentially random. It is only on a much larger scale of closed trades that the edge becomes apparent.

So by what you expect, I didn't mean, expect 3 for 1 every 1 risked. Or whatever.

Now we can go back to your example: you enter a long on a bullish breakout setup. It's bullish to you specifically because your testing shows that statistically, it is bullish.

Now, what are you expecting from this trade?

In terms of profit, it simply isn't known! Some dinosaur could come along and sell a billion dollars of the stock you just bought, or Goldman Sachs might be taking over the company. Anything is possible

But, there are expectancies you can define:

For example

"If I trigger a long from my bullish setup and the price falls back to the breakout level and continues lower to close below the nearest swing low I expect that the breakout has failed, and would like to exit at an N% loss."

"If I trigger a long from my bullish setup and after 5 days the price still hasn't retraced to my entry point, I expect the breakout has potential to mature into a real trend so I will move my stoploss to breakeven and let the trade run."

"If I trigger a long from my bullish setup and the next day it prints a bearish reversal bar, I expect a 2b setup is in play and exit for breakeven."

"If I trigger a long from my bullish setup and it retraced to the breakout level and then formed a bullish key reversal pattern I expect this to be a good place to attempt a pullback trade."

etcetera, etcetera.

Remember, I stated what I viewed is the problem: you don't know what you are expecting.

and I didn't mean, how many Rs worth of profit you expect! Some will be small winners, some will be small losers, most of these trades will net out to 0 against each other. Don't worry about that. Just try to stay in the game and as long as you know the answer to the why of your setup (why does your setup have the potential to hit home runs? Usually the answer for breakout setups is that they put you first in line for all the moves - you buy high to sell higher and sell low to cover lower), then you should have no issues executing it again and again looking to hit that home run which moves your equity curve up a notch.

Very insightful post. Thank you for taking the time to compose it.

What this has made me realise is that I don't have anywhere near the level of expectations I need. My trading expectations are a bit wishy-washy.

I think because I have read so much and there is so much to take in I am experimenting with a little bit of this and a little bit of that and am still trying to figure out (through testing) what actually works.
I guess this is something that comes with lots of testing and more experience?

 

[pavilion103]

Your fighting an up hill battle.
Nothing much is trending so to expect breakouts to continue in the short term is un realistic.
If you have a look at where these breakouts are occuring in the life cycle of the chart youll find many are topping.
Thats ok but before they move even further into another cycle of trending they are likely to pull back and range.

Timing at the moment ---regardless what and how you trade---is pretty awfull.
If I get sometime tonight Ill chart up.

That is a question I was going to ask. The overall market seems to be ranging? There doesn't seem to be much trending.

Do you find yourself trading less during this time?

 

[Boggo]

Do you find yourself trading less during this time?

In my case the answer is a resounding yes, a lot less.
Watching a number of potentially fantastic setups taking shape is where my attention is at the moment.

A current holding is ILU which if you have a look at where it turned back up will give you an idea of what I am looking for and preparing for.
There are a lot of stocks that have topped and now seem to be in the latter stages of this type of correction, ILU seemed to jump the starters gun.

Just my

(click to expand)

 

[tech/a]

That is a question I was going to ask. The overall market seems to be ranging? There doesn't seem to be much trending.

Do you find yourself trading less during this time?

In my situation yes as well.
You just dont get the setups that I would take as a trade.

Currently I have no open positions which has everything to do with 2 mths in Europe and nothing to do with the market!

I'm shutting down from all things which are considered WORK!

 

[Boggo]

A current holding is ILU which if you have a look at where it turned back up will give you an idea of what I am looking for and preparing for.

Just a follow up, took profits on ILU, stopped out at $14.59.

(click to expand)

 

[pavilion103]

Just a follow up, took profits on ILU, stopped out at $14.59.

(click to expand)

Sory for my ignorance. But was that stop level some sort of retracement? or how did you determine that?

Cheers

 

[Boggo]

Sory for my ignorance. But was that stop level some sort of retracement? or how did you determine that?

Cheers

A break below the low of the last bar prior to the most recent high.

Keeps you out of trouble on volatile stocks or on stable stocks in a volatile market.

 

[pavilion103]

One thing I have really been focusing on recently is how to reduce my average loss. Whereas previously I was losing around 1R per trade I have found that more of my losses are now falling in the range of 0.4R-0.8R.

This seems to have coincided with trading more Retracement Setups.

In the chart below my entry is the green line ($2.26) and my initial stop is the thick red line at $2.38 inside the triangle pattern. As you can see, I have waited for a pullback to the triangle and then entered on a close below the retracement setup. After the down day which follows I trail my stop to 1 tick above the pullback high at $2.33.

Now instead of having my stop at my initial 1R level it is at 0.6R, almost half the risk. Granted this can see a trader stopped out more often, however should the trailing stop be at a strong point of support/resistance or pivot low/high then this seems to work well.

What are other's thoughts? Is this what most people do to reduce risk?

 

[white_crane]

Excellent thread with some great info.. Thanks to all the contributors.

 

[Boggo]

Almost forgot about this thread. Current pullback and re-enter positions.

Bought back into ILU at an average of $15.37 triggered by the breakout above $15.28.

Similiar setup on ALK (ALK thread here... ALK posts )
Entry was on the break of $1.82, first hurdle was a close above "B" at $2.36 but that has not happened yet, nearly though, expecting it to fall back a bit on Monday, stop is below $2.17.

As I suspect that next week could be a test for both ILU and ALK, the usual procedure applies, tight stops and no hesitation to bail out and sit back and watch.

(click to expand)

 

[IFocus]

Nice work Boggo