Breakout systems

[Synergy]

Fairly general question, but has anyone got an opinion on the historical performance of breakout systems?

Are they something that have always worked to some degree?

The reason I ask is because I originally developed a breakout system based on 2005 - 2007 data. It worked well when ran live late 07, but now I've put data from 97 - 2004 into the system and results are fairly poor. I realise the general market performence over that period was fairly different but I thought i'd ask anyway.

I'm curious as to whether breakouts are a thing of strong bull markets I guess, and whether they're worth trading at other times.

 

[julius]

Synergy,

Howard Bandy talks about the performance of breakout systems declining significantly since the turtle systems became widely known.

One of the problems with breakout systems is the large number of trades required to infer performance statistics. It's hard to know whether the system has become unprofitable or is just waiting for the next breakout. You need to look at historical win% and sample sizes to figure this out.

If you want to look at the influence of market conditions on the system it might be worth looking at random entries and exits applied with the same money mangement rules.

 

[tech/a]

Everything--thats EVERYTHING breaks out either to the up or downside of a chart.
"V" Tops and bottoms are rare and simply another trading condition.

From Support or Resistance or some sort of pattern.
There are methods using this right now which are up over 100% since Jan.

Applying trading methodology will turn the profit.
The exit becomes more important in conditions like those we have now.
You also need to be able to trade short.

 

[MRC & Co]

Agree 100% Tech.

Something I have been working on myself now intensly for several months, only just worked out Radge was the master of this exact method (my bad for not reading his book earlier and realising he was not simply using EW and Volume to decide his trades)!

 

[Sean K]

Everything--thats EVERYTHING breaks out either to the up or downside of a chart.
"V" Tops and bottoms are rare and simply another trading condition.

Yes, but depends on time frame too. Short, medium, long, and all the bits between.

 

[tech/a]

Yes, but depends on time frame too. Short, medium, long, and all the bits between.

All timeframes all "bits".

 

[Sean K]

All timeframes all "bits".

Tech, do you think longer time frames have more validity than shorter time frames?

 

[tech/a]

No.
All timeframes are valid.

The clue to how wel that breakout (Of pattern support/resistance) I believe is in the 5 bars preceeding the alert bar (Or breakout bar). In any timeframe.

Here is an example of "Reading the Action" in this trade.
I have a small position.
What do you think the LAST 2 bars are saying?

 

[Porper]

No.
All timeframes are valid.

The clue to how wel that breakout (Of pattern support/resistance) I believe is in the 5 bars preceeding the alert bar (Or breakout bar). In any timeframe.

Here is an example of "Reading the Action" in this trade.
I have a small position.
What do you think the LAST 2 bars are saying?

The new price levels have attracted sellers (supply) has come in to the market.

The last bar is a very strong signal that prices have reached their peak for the short term at least.On the face of it a 5c rise looks good but don't be fooled, there was a strong rejection from well over a dollar.

Also a copy of the preceding price action (5th and 6th bars) so it could be likely that we will get the same consolidation as before.Definitely i.m.o should be out of this trade if you are an intra day trader, if not a sell stop on a break of previous close.

 

[julius]

Are we talking mechanical systems or discretionary?

 

[tech/a]

Thanks Pete and a sound analysis.
The question still remains in this move wether all supply has been absorbed.
Demand wasnt overcome and as such this bar may become a sign of strength if trading can keep above its low. Until then at least my trade is left open.

But back to KENNAS question.

Looking at the same trade on a weekly chart.
Clearly not telling the exact same story.
Well not the ending at least.

Julius.
Simply place whatever criteria you wish to use in your system.
The point I'm making in system design is that the breakout ALONE is not the important issue.
Managing the trade and the exit will determine any system success not JUST the breakout.

 

[Porper]

The question still remains in this move wether all supply has been absorbed.
Demand wasnt overcome and as such this bar may become a sign of strength if trading can keep above its low. Until then at least my trade is left open.

John,

Agree that if price can keep above the last bar low, it can still go higher, and in normal market conditions this would be my plan, however in this market a 100% rise accompanied by the supply that came in is pretty good, and tempting to take profits.

Maybe market conditions have stabilised and it is time to let the trend run a bit rather than having fixed targets and tight trailing stops.?

On a side note, these set ups are great i.m.o. usually offer good R/R and have a high probability outcome.INL on which I posted on just before the breakout a couple of weeks ago was a another example of what Tech is showing.

 

[nizar]

Fairly general question, but has anyone got an opinion on the historical performance of breakout systems?

Are they something that have always worked to some degree?

The reason I ask is because I originally developed a breakout system based on 2005 - 2007 data. It worked well when ran live late 07, but now I've put data from 97 - 2004 into the system and results are fairly poor. I realise the general market performence over that period was fairly different but I thought i'd ask anyway.

I'm curious as to whether breakouts are a thing of strong bull markets I guess, and whether they're worth trading at other times.

Thats interesting.

My system is essentially a breakout system and it works phenomenally over 1998-2003, even better than it does over 2004-2007.

My own personal belief is that when it comes to equities, its better to always stay in the market due to the historical bullish bias, if you can afford to. If I was 50 or 60 then obviously I would think about it differently.

There are always stocks breaking out, there are just MORE OF THEM during bullmarkets.

A better way to approach filtering out bad trades would be to use sector analysis. I was going to seriously take this approach but the price S&P were quoting for sector/index data was far beyond what I was willing to spend. Maybe in the future.

 

[julius]

Chart for SUN below.

I've circled the NR7 bar which also aligns with the prior swing lows.

Reasonably bullish IMO, despite a couple of weak closes within the range...

 

[tech/a]

SUN
Is displaying signs of no demand (Volume rising on down bars) within the consolidation.
Untill this alters its is likely to break to the downside.
In my opinion.

Weekly has a similar view.

 

[Porper]

Chart for SUN below.

I've circled the NR7 bar which also aligns with the prior swing lows.

Reasonably bullish IMO, despite a couple of weak closes within the range...

Julius, here is my take on it.You would be trading the correction (nothing wrong with that).

It is definitely a corrective pattern going up, overlapping waves, while the impulse is obviously down.

There is high volume around the "double bottom" which is bullish, and as you rightly point out the bar I have labelled a wave 2 signalled that the sellers had dried up.

There has however been a lack of demand since that point, meandering up on light volume.

A break out of the consolidation pattern (13.71) on good volume would be bullish for the wave C to continue i.m.o.

 

[Kauri]

Fairly general question, but has anyone got an opinion on the historical performance of breakout systems?

Are they something that have always worked to some degree?

The reason I ask is because I originally developed a breakout system based on 2005 - 2007 data. It worked well when ran live late 07, but now I've put data from 97 - 2004 into the system and results are fairly poor. I realise the general market performence over that period was fairly different but I thought i'd ask anyway.

I'm curious as to whether breakouts are a thing of strong bull markets I guess, and whether they're worth trading at other times.

Most people look for breakout/pattern trades to the upside due to the longish bull run... I have found altering/adapting your method to look for breakdowns in the bearish phase we are going through serves me well...
Cheers
...........Kauri

 

[MichaelD]

It is my belief that a breakout as an entry is a very poor entry per se when assessed over all market conditions, significantly underperforming random entry in profitability and drawdown.

I believe this is partly because it is known to be a very popular entry trigger and partly because there is a strong tendency towards mean reversion after a breakout.

Note that the above statements are NOT mutually exclusive of a statement that breakout systems can be very profitable - it's just that they can be profitable DESPITE the entry, not BECAUSE of it.

 

[Sean K]

But back to KENNAS question.

Looking at the same trade on a weekly chart.
Clearly not telling the exact same story.
Well not the ending at least.

Tech, still haven't seen any evidence to my perception that longer term breakouts hold more validity than short term ones (anomalies). I obviously have no data myself, so I wait to be corrected with your assertion. I have read somewhere that market psychology is more reliable over longer periods of time. Like anything. Perhaps short term break outs can be trusted - in the short term... Maybe Howard has an answer to this.

 

[tech/a]

Kenna's.
I'm not really suggesting that if the longerterm signals a bullish breakout then thats what we should be looking for in all timeframes. As we drill down lower in timeframe we will see both bullish and bearish trends within trends,and breakouts preceeding many moves.
Trade each timeframe.

Michael.
I presume your talking of a conventional braekout from support or resistance.
Pattern Breakouts,Range Breakouts and Volume Breakouts are less explored.
Even gaps can be placed in the breakout basket.
Add to these timeframes (Have you ever thought of using say a 2 day bar chart?) and correlation of signals become remote.

Like you I have no definative evidence to support success other than my own trading and observations. If your going to have a trend of any sort in ANY timeframe price will breakout of something!