Before we even enter the breakout trade. We need to have an exit strategy. Rapidly moving breakout trade kill unprepared traders.
So how do we approach exits in breakout trade. Whether it be target profit or stop out. During recent years we have tested multiple approaches on historical data. We have found some useful facts about breakout trade liquidation that might surprise you.
1:1 Risk reward ratio does not work the best for breakouts
Conservatively, traders are told to target the profit that equals tunnel width.Stop loss should be placed at opposite side of the tunnel. In thousands of historical data test we have found out that it doesn't work (at least on automated systems). Fakeouts are simply too frequent. Manually trading specialists might have a better chance, but still. We feel that they are leaving a lot of money on the table. Profit needs to be either much wider (to catch more of the trend) or ultra tight, to take advantage of fakeouts.
Ride the trend using the trailing stop
When trading the breakout, we have achieved best results using trailing stop. Once you get your position in profit, lock in your gains by using TS. Let it follow the trade until market itself stops you out. TS can be based on various indicators or simply based on last closed high/low. (Check out our MT4 EAs using trailing stop).
Placing stop loss at opposite side of a tunnel
This conservative approach has one flaw. Opposite side of the tunnel is often tested by price even on the valid breakout entry. If you can, put your stop loss little further. Safe distance will always vary. Volatility and previous fakeouts must be considered. The second option is to place SL on the last swing before the breakout within the trading range. This usually means that we can place our stop loss somewhere in the middle of range. This little trick can really improve Risk reward ratio, while not damaging winning frequency too much.
Use break even function
When breakout position reaches certain profit, place stop loss on break even.The only exception is when using ultra tight stop loss. Break even function is a must. Using it wisely will ensure that you get out of most of the failed entries unphased.
Increase profit target
Good breakout will travel further than you expect. By asking for more and increasing your RRR you also increase your fakeout survival chances. Increase profit target even more if you trade in the direction of medium to major trend.
Effective use of pyramiding
When you look at the historical data, you will find out that major breakouts are the best opportunities to apply pyramiding (adding to the winner). Pyramiding is aggressive trading method with extreme upside and limited risk. We apply it, by adding trades to our winning position. We will keep adding trades until the move lasts. It is not uncommon to add 20 to 30 trades to initial order, while not risking more than tunnel range of initial trade. RRR using this approach can easily reach 1:20 to 1:100. NEWS and breakouts MT4 EA is expert advisor specifically created to trade this type of high reward low risk scenarios.
Multiple entry with increased leverage
Market will play tricks on you with its its fakeouts. You can play the trick back by switching trade directions with increased lot size (2x). You can do so multiple times until you get in that trade. As you get better in breakouts and your success rate increases. This might be the method that will get your results on another level. It very useful especially when trading narrow range or doji. With this type of approach SL is usually placed at opposite side of a tunnel, together with pending buy stop/sell stop order with double lot size.
Conclusion on closing the breakout trades: no matter how you approach the breakout position closing you can succeed. But you can also fail. It all comes to mastery of approach. Little nuances, and cold precision.
Breakout can create emotional rollercoaster. Not only that. Sometimes one second is a much too late. Expert advisor such as NEWS and breakouts MT4 EA can remove a lot of tension, hesitation and mistakes.
