From the May 2013 issue of Futures Magazine • Subscribe!

Everything you know about breakout trading is wrong

Another example using this method for entering in anticipation of a breakout is shown in “Go with the flow” (below). The Dow had fallen into a narrow trading range. Near the beginning of the range, it did not show a strong bias for the direction of a breakout based on the five-minute time frame alone because the momentum of swings off support and resistance within the range was comparable in “A” and “B.”

As the channel progressed, however, overall momentum shifted and a smaller channel formed in “C” that consisted of another two-wave correction off the highs of the larger channel. This time, the momentum of the second wave lower was similar to the first, so when the pullback broke higher, it retested the entry zone. Because the second pullback was not stronger than average, however, it still held and offered a much larger return on risk than waiting for the upper end of the entire channel to break.

The main goal of a trader, no matter the strategies employed, is performance consistency. An ideal strategy is one that returns more than the risk, and does so more than 50% of the time. Few raw breakout strategies will achieve this. However, by tweaking our setups to use triggers within the range itself and by taking momentum into account, stop levels can be cut by one-third to half, while the odds for success increase.

Additional tweaking is possible, and can yield even better returns; however, the number of trading opportunities diminishes. It’s the burden of every trader to find his or her own comfort level when approaching risk because higher accuracy does not translate always into higher returns. 

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About the Author
Toni Hansen

Toni Hansen is president and co-founder of the Bastiat Group, Inc., DBA Trading From Main Street. Toni is one of the most respected technical analysts and traders in the industry. She has been trading and educating new traders, money managers, professional market analysts and traders throughout the boom and bust of the last decade. She has worked in conjunction with some of the world's top financial exchanges. Learn more about Toni Hansen and the educational services she provides through her website at http://www.tonihansen.com.

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