Sometimes breakouts work as a trading signal, and sometimes they don’t. Generally speaking (and with some exceptions), they work when a market is trending, and lose money when it is not. I have metrics that give an indication of whether trading breakouts is likely to work at a particular time or not, and I constantly refine them and look for more.
However, even when breakouts seem likely to work as a trading signal, I do not trade all of them. In fact, I only trade the ones that I judge to be significant. Increasingly, however, I think this may be a mistake. A good example comes from the soybean market. Recently I have been expecting a rally in soybeans and have been watching the market; but when there is a breakout I wait for a pullback, or worry that it has already gone too far, or some such thing, fail to trade, and watch it continuing to rally. I have traded once, on the only recent occasion where the market reversed before moving upward. So I have lost money when the market has trended upwards and a breakout strategy has worked well. Certain other markets have been a similar story — treasuries, the CHF and USD/JPY, for example.
The chart page below shows the realised equity of various kinds of breakout strategy applied systematically to the soybean market. Note that almost all long strategies (green lines) have made money in the past couple of months.
- My fundamental research and watching of the newsflow does not give an indication of where markets are going to go in the next couple of days — but that is what matters when it comes to getting stopped out or not.
- Using “judgement” on a particular trade can too easily become trading only when one feels comfortable. If I have started to feel comfortable, it is likely that other people have as well — a good contrarian signal.