When breakouts fail | stockbee


When breakouts fail

LM was a trade I entered on breakout and next day got stopped out with small loss of 1.4%.

Breakout failure in momentum burst is something I am not afraid of. It is very much part of the game. Ugly failures like LM happen. There are out many ways to avoid them.

The trick is in good risk management . In LM trade I had 20% of account invested, but my risk was only .25%.

Risk = entry-stop

So the trade not working resulted in just .28% loss on overall capital (.28 due to slippage as I exited few cents below stop)

Trading momentum burst is a probability and number games. Over large number of trades the winners and losers can e equal but if the winner has higher profit than losses on the losers you come out ahead.

Last year only 50.5% of my trade in this method were profitable but the winning trade produced more profit than losing trades.

If you have that kind of equation then it becomes a game of doing sufficient number of trades to get good returns.

Even if the ratio is not 2.21/1 you can still make lot of money with lower ratio provided you make sufficient trades.

That 1.62/1 ratio still produced 73.75% return for the year.

Sometime one large uncontrollable loss making  trade can skew the averages. Let us say you had close stops and the stock gaps down, you end up taking more losses than you planned for.

In an ideal world I would like to enter a no losing trade and have a stop as close to entry as possible , but that is not how this particular setup works.

One of the things you will notice if you trade this kind of setup is that at market turns or correction areas you become vulnerable to losses.

When you play a momentum trading style , sudden shift in momentum like we saw yesterday can result in lot of breakout failures.

That is part of the risk involved in trading momentum.

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