Quote from stocktrader:
I don't understand this, how can a pull back system which as you have already mentioned is trading against the immediate short term trend run at 75-80%, whereas a break out system, which is going with the current trend only run at 50%.
The way I see it is that pull back systems win less often than break out systems, but can operate with tighter stops. Break out systems on the other hand win more often than pull backs but have to operate with looser stops.
A pullback system is not in fact intended to trade against the longer term trend, but enter in the same direction. The trader is simply entering after the pullback, or when he feels the pullback has ended, or is about to end. So he is typically following the trend, but at a low price level.
However, a breakout trader is jumping into an existing trend during the move.
In both cases the trader is with the trend, but entering at different times in the price cycle. A pullback trader enters on weakness, a breakout trader enters on strength. Both have their value, but they do have different win/loss ratios generally.
The reason a pullback system will typically have a larger win/loss ratio is because the selling has already been exhausted, and the overhead resistance is now some distance away. So if the entry is timed correctly, a good percentage of trades will often make it a reasonable profit target.
However, in entering a breakout the stock is often making a near term high, and is often already in an oversold condition. The trader is taking the risk that the stock will continue to move up. And with many breakout systems, roughly 50% of the time that will not happen. The move will stall. But the breakout trader is willing to lose 50% of the time, with the idea that the winners will keep moving in a strong trend, and overcome a lot of small losses that may have reversed after entry.
Both systems can be overall profitable, and often on an equal level. But the winning trades on a breakout can often be larger than those on a pullback, although there are fewer of them.
But the big difference in win/loss ratios is why the systems appeal to different kinds of traders. Personally, I prefer a larger percentage of winners which is why I trade pullbacks. Others, who trade breakouts, would rather watch their winners run for a larger gain, and are willing to give up small losers.
