Trading For Beginners » Systems Learn to trade Tue, 18 Dec 2012 12:23:48 +0000 en hourly 1 Breakout Trading in All Market Conditions Mon, 15 Nov 2010 19:23:02 +0000 admin Finding a trading system that will operate well in all market conditions is the stuff of dreams for many traders. But break out trading, as described here, comes very close to being a system that does exactly that.

You see, many trading systems, such as trend trading systems, are designed to identify a trend and then stay with it until its end. This is a very powerful way to trade – except, of course, when the market is not trending. In difficult market conditions a trend trader often finds few opportunities and can have many false starts. Sometimes they may find themselves sitting on the sidelines trying hard to exercise some patience.

I’ve had some experience with this because I like trend trading and have several very successful trend trading systems . Following the rules of these systems means that I will never lose much money but without a trending market it can sometimes be very difficult to move ahead – but this is where break out trading comes to the fore.

Break out trading is essentially momentum trading following a break out from a Point of Agreement; where a Point of Agreement (POA) is a momentary balance in forces on a share price, see chart below.
image 11 Breakout Trading in All Market Conditions

This works well in all market conditions because of 2 important factors; the entry and exit signals are not based on trending attributes. Rather, the entry for a break out trade is a break out from a Point of Agreement (POA); where a POA is a period of diminishing consolidation or a triangle. Triangles occur in most market conditions but are particularly prevalent in sideways markets – being of a sideways nature themselves.
The exit for a break out trade is based on momentum. This is relevant to break out trading because after a period of consolidation share prices tend to rally; sometimes quite strongly. This increase in the rate of change in price (or momentum) can be monitored using a momentum indicator such as the MACD . Any weakness in the momentum would signal a slowing of the price and an end of the break out rally.
image 21 Breakout Trading in All Market Conditions

Thus, putting together a break out trade would look something like that shown in the chart below; where the arrows indicate the entry and exit signals. It is interesting to note that overall the share price in this chart was sideways; no trend developed yet a profitable trade was extracted. This illustrates the beauty of a break out trading strategy and how it can work well in difficult market conditions.
image 31 Breakout Trading in All Market Conditions

Of course share prices can also consolidate and break out during trends as well. The chart below shows a trending share that had two breakout trades within it. The rallies within the trend were captured. So you can see how break out trading can operate in either a trending or a sideways market. Identify the break out – get into the market quickly and capture profits – and then lock them in with a tight stop loss.
image 4 Breakout Trading in All Market Conditions

There are other advantages of break out trading besides being an all-terrain trading system. For example, a break out from a Point of Agreement is a high probability trade set up. Recent back testing, based on the break out trading strategy described on my website ( showed over 60% of trades were profitable. The strategy also has a high profit ratio with an average profit to loss ratio in recent back testing being about 2.3:1.

Furthermore, break outs can be up or down which means that both Long and Short trading opportunities can arise. However, the majority of trades tend to be Long; about 80% in recent back testing, so Short trading opportunities are available but can be overlooked depending on a Trader’s preference.

Break out trades exist in many time frames but a weekly time frame is quite robust for trading. This timeframe irons out daily volatility and allows some rallies to develop to very profitable levels. Recent back testing indicates that the average length of a trade using a weekly approach is about 9 weeks. Hence the system is a relatively short term, medium risk strategy.

By Alan Hull

For a complete set of current back testing results and a full explanation of a Breakout Trading System, please go to This is an ideal type of system to use in conjunction with a trend trading system, where the break out trading can fill the gaps when the market might be consolidating or reversing.

]]> 0
Trading System Sat, 30 Oct 2010 13:37:03 +0000 admin Now you have decided that you are going to trade a particular security and you need to find a way of entering and exiting the market. So, how do you approach it, do you just jump in with a gut feeling or do you use some kind of system to help you make the decision.

We will look at a few ways traders decide on the best way to make a decision.

First there is just guessing which way the market is going to go. Now as surprising as it may seem there are many trader who do just that.

They take a look at a chart or some news and then decide if they should buy or sell. If they make money consistently then it is hard to argue that this is the wrong way to trade the market. The problem I see with this type of trading is that it is almost impossible to reproduce results consistently.

In other words the trader that trades by instinct can never really pass on his knowledge, as there is no clear rules that he applies to the market on a regular basis. I know a few trader who trade like this but unfortunately I don’t know any who have gone the distance and are there year after year.

Traders who apply a method to their trading inevitably have better results. If you use the same criteria to each trade then you at least have a reference point from which to work. If you are losing you can then change specific things in you’re decision making process in order to find the right criteria.

By using a method in your trading you are moving towards the scientific approach and just as a scientist will carefully research and record each experiment so should the trader trying to perfect the method he is using.

If you apply XYZ as your reason for entering a trade and you can see after a predetermined amount of trades that it is not working then you can change X, Y or Z until you find something that does work.

Typically the method trader has researched a particular theory he has by doing back testing (applying the theory to historical charts) and comes up with indicators, tools or some other method of determining the entry and exit criteria. If at the end of his research he find that he can make money he will then apply that method to the market.

As he still has to make the decision to enter or exit a trade there is still the human element to consider. Even though his method tells him he should enter a trade for some psychological reason he decided not to take the trade. There lies the weakness of the method trader.

Even though he knows he should enter or exit a trade he doesn’t because at that particular moment in time some voice inside him tells him not to do it. The solution is to make it mechanical as much as possible.

Mechanical trading systems. There has probably been more written about mechanical trading systems than any other topic in trading. The premise of mechanical systems is that a particular theory he’s been beck tested over a long period of time and has consistently made money.

There is no emotion involved with the decision making process at all. If the system says buy the security then you buy or an order is automatically done for you.

This takes away all the emotional up’s and downs and all you have to do is buy the system and supply the money. I have been in heated debates with other traders about the value of mechanical trading systems. Some traders swear by them and others think they are a waste of time.

Which is true only the individual can answer. My own personal experience with systems after having tried a few is that they typically produce unspectacular results and after a time they tend to blow up and lose money.

The other reason I am not particularly fond of systems is that when you experience large draw down (your account goes backwards) you tend to lose faith in the system just before it kicks in.

Trading just as in life there are no correct ways to trade only what suits the individual. Some people will be suited to giving it their best bet whilst other will prefer to use a particular method and yet others will prefer mechanical systems.

It’s difficult to argue with a man who is making money. My own personal preference is to use a well thought out method, which is 90% mechanical, but the final decision is left to me.

Nothing will beat your own research and hard work.

If you can find a successful trader and ask him to mentor you this will save a lot of time on the learning curve. Learn every thing you can from him and then adapt it to suit your own style of trading. On closing, ask yourself this question? If you really did have the goose that laid the golden eggs would you sell it?

Good Trading

Mark McRae

]]> 1