Buying breakouts, along with attempts to pick tops and bottoms tend to be some of the most common methods that people new to the markets attempt to do. The problem is neither of these methods really are suited for the new trader.
Before I go on I would like to discuss the reward to risk ratios for breakouts compared to attempting to pick tops and bottoms. The problem with attempting to buying breakouts is that your are suspect to being caught in a market head fake. One problem new traders tend to develop is that they do not have the ability to reenter a trade so instead they tend to violate their mental stops. This is about the worst possible thing you can do. At the same time new traders that stick to their stops often do not get back into trades once they are stopped out and they end up missing the eventual move however they were in a head fake. In a nutshell buying breakouts tends to have a low winning % and the profit potential cannot always be quantified because there are no resistance levels because the trade is making new highs.
In attempts to pick tops and bottoms it tends to be very similar in respect to buying breakouts. Although the strategy is nearly the opposite the way people, in particular new traders execute it is mostly the same. When you are attempting to catch the low trying to minimize risk what new traders often do is they violate their stops. This is an even bigger risk when attempting to catch a top or bottom BECAUSE OF the people trading the OPPOSITE strategy of attempting to catch breakouts. Once you violate your stop an the trade begins to break either to the upside or the downside your small loss can very quickly turn into a big loss when this trade turns into a breakout to the opposite side the trade that you were trying to take.
Now what is important to take out of all this is to remember what to expect when trading these strategies. When you are attempting to trade breakouts realize that another major party is attempting to fade you and trying to trade tops and bottoms. Also when you are trying to trade tops and bottoms there are people trying to trade breakouts at these points. Because of these very prevalent strategies in the market these points become the key swing or support/resistance points. I believe one of the biggest ways to gain an edge in the markets is to be able to identify these points and trade off the reaction of the market to these points. Instead of trying to have a tendency to buy breakouts or catch tops and bottoms see what the market is trying to tell you and trade off that. In effect trade both strategies.
In terms of quantifying reward to risk ratios along with probabilities of a winning trade the trades are very different.
People attempting to catch breakouts are going to be wrong a high % of the time but when they win they will win a lot. At the same time people trying to trade tops and bottoms will tend to be right a higher % of the time but their winners will not be as big and their losers will big bigger.
The single biggest thing that i have gained during understanding this process is that one must be able to quantify their reward to risk ratio. Before a trade is taken a trader should have their profit potential and risk quantified as a ratio. This skill will not be easy for a new trader to acquire but over time they should begin to get a feel for a close ratio. Using this method along with understanding the key swing points i believe are the single biggest ways for a losing trader to turn around no matter their stategy.
What are other peoples thoughts on using these methods to go along with a traders strategy. Personally I have no strategy in particular I just use the method I have described.
Before I go on I would like to discuss the reward to risk ratios for breakouts compared to attempting to pick tops and bottoms. The problem with attempting to buying breakouts is that your are suspect to being caught in a market head fake. One problem new traders tend to develop is that they do not have the ability to reenter a trade so instead they tend to violate their mental stops. This is about the worst possible thing you can do. At the same time new traders that stick to their stops often do not get back into trades once they are stopped out and they end up missing the eventual move however they were in a head fake. In a nutshell buying breakouts tends to have a low winning % and the profit potential cannot always be quantified because there are no resistance levels because the trade is making new highs.
In attempts to pick tops and bottoms it tends to be very similar in respect to buying breakouts. Although the strategy is nearly the opposite the way people, in particular new traders execute it is mostly the same. When you are attempting to catch the low trying to minimize risk what new traders often do is they violate their stops. This is an even bigger risk when attempting to catch a top or bottom BECAUSE OF the people trading the OPPOSITE strategy of attempting to catch breakouts. Once you violate your stop an the trade begins to break either to the upside or the downside your small loss can very quickly turn into a big loss when this trade turns into a breakout to the opposite side the trade that you were trying to take.
Now what is important to take out of all this is to remember what to expect when trading these strategies. When you are attempting to trade breakouts realize that another major party is attempting to fade you and trying to trade tops and bottoms. Also when you are trying to trade tops and bottoms there are people trying to trade breakouts at these points. Because of these very prevalent strategies in the market these points become the key swing or support/resistance points. I believe one of the biggest ways to gain an edge in the markets is to be able to identify these points and trade off the reaction of the market to these points. Instead of trying to have a tendency to buy breakouts or catch tops and bottoms see what the market is trying to tell you and trade off that. In effect trade both strategies.
In terms of quantifying reward to risk ratios along with probabilities of a winning trade the trades are very different.
People attempting to catch breakouts are going to be wrong a high % of the time but when they win they will win a lot. At the same time people trying to trade tops and bottoms will tend to be right a higher % of the time but their winners will not be as big and their losers will big bigger.
The single biggest thing that i have gained during understanding this process is that one must be able to quantify their reward to risk ratio. Before a trade is taken a trader should have their profit potential and risk quantified as a ratio. This skill will not be easy for a new trader to acquire but over time they should begin to get a feel for a close ratio. Using this method along with understanding the key swing points i believe are the single biggest ways for a losing trader to turn around no matter their stategy.
What are other peoples thoughts on using these methods to go along with a traders strategy. Personally I have no strategy in particular I just use the method I have described.
