Risk management on breakout trading

[Leopard9]

Hi guys. Im struggling to create a rule on breakout trading for longer holdings. I would like to ask you how you manage risk there. For example If it goes in your favor and signals a reversal on a short time frame do you stand your ground with your stop or trail it? Sometimes Its possible to antecipate and get a better price before, sometimes its better to wait for confirmation. What say you?

 

[carrer]

Hi guys. Im struggling to create a rule on breakout trading for longer holdings. I would like to ask you how you manage risk there. For example If it goes in your favor and signals a reversal on a short time frame do you stand your ground with your stop or trail it? Sometimes Its possible to antecipate and get a better price before, sometimes its better to wait for confirmation. What say you?

You have to backtest them. Compare the stats among those 2 and see which is better. That's the only way to confirm it.

Also, you will probably get a reversal breakout signal before the price reaches your stoploss if you use the same parameter for long and short. So it doesn't make sense for you to keep holding your position when you get a reversal signal.

 

[Leopard9]

You have to backtest them. Compare the stats among those 2 and see which is better. That's the only way to confirm it.

Also, you will probably get a reversal breakout signal before the price reaches your stoploss if you use the same parameter for long and short. So it doesn't make sense for you to keep holding your position when you get a reversal signal.

Yes, makes sense. Its a dynamic process. Yet i've been quite "unlucky" lately. Potential good trades not trailed got stopped, others not looking so good were trailed just to move away favorably and brutally without touching entry. At this point in time I need to avoid frustration as much as I can. Hence the rule.

 

[Leopard9]

There is something Brett Steenbarger wrote on his psychology 2.0 book that says "A valuable best practice is to mentally rehearse scenarios of being stopped out and undergoing planned losses. If we are unconfortable with those scenarios, we know that our emotions are not aligned with your trading plan. Without that alignment we are likely to front run our stops and targets and further erode our trading edge".
Its a dynamic process of course, but without a general rule as a base and outcome acceptance, frustration builds up.

 

[SimpleMeLike]

So it doesn't make sense for you to keep holding your position when you get a reversal signal.

Carrer,

Good point, but I believe this depends on time frame. Smaller timeframes , there is sometimes noise that looks like reversal signs, but staying in the trade often leads to win.

 

[Leopard9]

Lets do a little exercise. This was a trade I was in. There is the red retracement line. Tested, and plunged. Entry point on the line short. How would you manage this trade exactly? This is a 15 min chart. The idea was to let it run short to the next retracement line.

 

[SimpleMeLike]

Yes, makes sense. Its a dynamic process. Yet i've been quite "unlucky" lately. Potential good trades not trailed got stopped, others not looking so good were trailed just to move away favorably and brutally without touching entry. At this point in time I need to avoid frustration as much as I can. Hence the rule.

Hello,

Carrer is correct. Knowing when to exit is a challenge for sure. I struggle with it my self. I have predetermined profit targets , and I stay on trade til they are hit. There are times I adjust my stop my loss to trail an strong leading winner..

 

[SimpleMeLike]

Lets do a little exercise. This was a trade I was in. There is the red retracement line. Tested, and plunged. Entry point on the line short. How would you manage this trade exactly? This is a 15 min chart. The idea was to let it run short to the next retracement line.

I would do the following

1. Set profit target at the next retracement line
2. Trail by a certain dollar amount (or price price action levels) so I atleast make money on the trade incase price reverse.

Both 1 and 2 leads to making money. And the goal is to make money.


Allsssooooooo, in my journal or tracking spreadsheet, I am tracking to see what happens when I leave stop loss and predetermined profit target in place and DO NOT exit. I want to know how much money this makes over time as well versus the trailing way. It is all testing and observing.

Write down all the ways you want to manage the trade, and track the outcome in a spreadsheet. After about 200 trades, you will know what works best.

 

[Handle123]

Hi guys. Im struggling to create a rule on breakout trading for longer holdings. I would like to ask you how you manage risk there. For example If it goes in your favor and signals a reversal on a short time frame do you stand your ground with your stop or trail it? Sometimes Its possible to antecipate and get a better price before, sometimes its better to wait for confirmation. What say you?

I still have some stocks from entering in 2009, I don't plan on getting out of them as they pay good dividends based on what I paid for them in 2009. When my system stats show possible topping whether it be a pullback or mother of all final tops, I Hedge the open profits with either stock Put options or sell ES futures. Automation has formulas to produce correct positive expectancy for downturn, when end of pullback is expected system can buy more stocks and hedge that or will buy Call options. When stocks moving up, I sell one or both sides of options if movement is more calm upmove or just sell puts. You also have to develop when to get out of options if price does not correct, also test amount of days of having the hedge, never want them to keep for long amount of time unless they are near expiring of shorts.

Breakouts have the greatest risk as they are far from support, you might want to put on trend lines and buy on a bounce of them, support either holds or not, but regardless, take loss in stock and let put options go far enough to capture stock losses and fees. Most get it wrong, but not into keeping hedge on forever, they for getting in and/or hedging open profits for number of days or a week, never do I go past that amount as time decay are losses that add up.

 

[smallfil]

There is no such thing as a perfect exit on your trades. Like wanting to have your cake and eat it too! You have to decide between tighter stops to minimize giving back more of your profits or having looser stops to give your trade a chance to be a big winner or big loser. If it goes against you, you might end up a bigger loser. Of course, if it works, you might get a big winner as well!
At the end of the day, what matters is your edge. What is the size of your average gain vs your average loss. If it it multiples of your losses, chances are good you will make a lot of monies! I am assuming you are using proper risk management on your trades as well.