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Need help determining false breakouts...

  • #1
  • First Post: Edited Oct 25, 2007 9:23am Oct 11, 2007 2:14pm | Edited Oct 25, 2007 9:23am
Right, im not the best at explaining things but im gonna try, here goes;

I've got a system which i've managed to work out somehow, im sure others probably use it too, but i don't know, i've backtested it with positive results. I start out the trading day at 6:00am GMT on GBP/USD, i place a horizontal line at every 25 points and entry is basicaly touch of a 25, if the price at 6:00am is going upwards and it touches the upper 25 figure i place a buy order and target 20 pips each time and have 30 pips as my stop loss; and vice versa for a sell.


I just feel this system needs some sort of SMA/EMA to compliment it in order to avoid false breakouts, im not an expert when it comes to indicators as i don't use MetaTrader, i use my brokers charts which isn't as sophisticated as MetaTrader. I've noticed that the false breakouts will be the burden in this system and so any help would be appreciated.

metro
  • #2
  • Oct 11, 2007 4:28pm Oct 11, 2007 4:28pm
  •  MPP
  • Joined Jun 2007 | Status: Be yourself, everyone else is taken | 2,734 Posts
Quoting metro
Right, im not the best at explaining things but im gonna try, here goes;

I've got a system which i've managed to work out somehow, im sure others probably use it too, but i don't know, i've backtested it with positive results. I start out the trading day at 6:00am GMT on GBP/USD, i place a horizontal line at every 25 points and entry is basicaly touch of a 25, if the price at 6:00am is going upwards and it touches the upper 25 figure i place a buy order and target 20 pips each time and have 30 pips as my stop loss; and vice versa for a sell.



I just feel this system needs some sort of SMA/EMA to compliment it in order to avoid false breakouts, im not an expert when it comes to indicators as i don't use MetaTrader, i use my brokers charts which isn't as sophisticated as MetaTrader. I've noticed that the false breakouts will be the burden in this system and so any help would be appreciated.

metro
you could start with a 5sma and a 50ema, i use these and find that price nearly always retraces to 5sma after a bounce of the 50ema.

2 other good ones are 100 and 200 sma. see how it goes, also look under the members list for WTB he uses an sma filter to identify trends and this may work well with your system. by that i mean if the trend filter indicates long then only take the long entries.

hope this helps move your ideas along

happy pipping.
  • #3
  • Oct 11, 2007 5:50pm Oct 11, 2007 5:50pm
If its got positive results, why try and "improve" it? If it aint broke....
  • #4
  • Oct 12, 2007 2:36am Oct 12, 2007 2:36am
Quoting MPP
you could start with a 5sma and a 50ema, i use these and find that price nearly always retraces to 5sma after a bounce of the 50ema.

2 other good ones are 100 and 200 sma. see how it goes, also look under the members list for WTB he uses an sma filter to identify trends and this may work well with your system. by that i mean if the trend filter indicates long then only take the long entries.

hope this helps move your ideas along

happy pipping.
Thanks for the reply MPP, how would i go about using that then? Buy if close above 5SMA and Sell if close below 5SMA?

Quoting Deadly Avenger
If its got positive results, why try and "improve" it? If it aint broke....
I know where your coming from, but i just feel that it might perform even better if false breakouts were avoided in order to lessen drawdowns?, im quite happy with the way it's going at the moment. As im fairly new to the Forex and inexperienced i thought i could post it for you guys to see if you can better the system with your experienced inputs.
  • #5
  • Oct 12, 2007 7:21am Oct 12, 2007 7:21am
Quoting MPP
you could start with a 5sma and a 50ema, i use these and find that price nearly always retraces to 5sma after a bounce of the 50ema.

2 other good ones are 100 and 200 sma. see how it goes, also look under the members list for WTB he uses an sma filter to identify trends and this may work well with your system. by that i mean if the trend filter indicates long then only take the long entries.

hope this helps move your ideas along

happy pipping.
hope you won't mind me asking if 5sma and 50ema will also help to reduce fake breakouts from consolidation patterns ?

will they be effective with 3hr and 1hr timeframes ?
  • #6
  • Oct 12, 2007 7:53am Oct 12, 2007 7:53am
Quoting findcount
hope you won't mind me asking if 5sma and 50ema will also help to reduce fake breakouts from consolidation patterns ?

will they be effective with 3hr and 1hr timeframes ?
Hijacking my thread hehehe. :
  • #7
  • Oct 12, 2007 8:08am Oct 12, 2007 8:08am
  •  MPP
  • Joined Jun 2007 | Status: Be yourself, everyone else is taken | 2,734 Posts
ok i try to answer all in one go.

i use 5 sma and 50ema on Daily 4h and 1h TF. generally a candle will always touch the 5sma, so if say on a 4h chart it breaks long, normally within 2 candles it will retrace to the 5sma.
now the 50ema shows movements against the trend, say the trend is long and the price starts to fall, it drops through the 5sma, normally it wil \l aim for the 50ema and then start long again, if it passes through the 50ema then we are looking to see the price move futher in that direction.

basiccally i was pointing out 2 or 4 very good indicators of direction.

apply them to some charts and look back to see how they would have worked with your system.

also look for Hakuna Matata in the members list he trades this way.
  • #8
  • Oct 12, 2007 9:38am Oct 12, 2007 9:38am
I only use support and resistance in my trades. The way I determine to keep away from false breakouts is to have confirmation. Most breakouts that are false usually return to their starting point within 1-2 session. So you could require close beyond the breakout for 2-3 sesssions to confirm that breakout.

Trading does not involve predicting if its a good or bad breakout. We just have to react to the market and trade profitably. Using confirmations with price action is something that I use.
  • #9
  • Oct 12, 2007 12:16pm Oct 12, 2007 12:16pm
I use to be a breakout trader for more than 18 months

FACT: breakouts are only successful about 30% of the time.

FACT:there is no way you can ever know which are false until they are false. No idicator, No MA, no oscillator.

Just accept it - those 30% of trades should pay for the 70% that lose - that's what breakout trading is all about.

of course most traders then go on and close the damn things early for too little profit and let the false ones run into greater loss.

but that's your mental problem.

do it enough and it will come naturally. but accept that you cannot avoid them and embrace each trade as a money management opportunity.

Hope this helps
https://linktr.ee/Soultrader
  • #10
  • Oct 12, 2007 12:56pm Oct 12, 2007 12:56pm
IMHO I feel your R:R is too high. You're risking 30 pips to make 20. You'd be better off with a R:R of closer to 1:1.Please bear in mind I'm not knocking your system, if it works for you, more power to you.
I traded in Gold and Silver futures for two years using a breakout form of trading.The basic idea was to trade the daily COMEX opening breakout, when volume was huge and sudden and then to close all trades when the London ME would close (while New York was still open) because volumes would die down. What a rollercoaster ride this was!! When it worked it was sweet, but when it proved to be a false breakout the hardest thing was to close off the trade. The thing is,apart from nerves of steel, you need to add a reliable volume indicator when you're thinking of trading breakouts.You also need to know your commodity, stock, or currency pair very well. In time you'd be able to get a feel for what it is doing and realise the tell-tale signs of a fake breakout.Like soultrader said, no indicator can help you with this.
Also, and FF is an excellent place to help you with this, I think you may be better served to continue developing a trading system of your own. Let's see, you'll need 1) S/R lines or trendlines or the lines you're currently using(2) a trade trigger or trade confirmation (MACD has become my trigger of choice) (3) clear exit points with a 1:1 R:R (4) something to check price action like candlestick patterns, James 16, and most importantly, (5) trend direction.Trade with the trend.the trend has the power to save you from yourself sometimes! This is just my opinion. There are more experienced traders on this forum that'll give you better advice.
I know I've said a mouthful, but i'm just trying to help.
Wishing you many pips.
  • #11
  • Oct 12, 2007 2:12pm Oct 12, 2007 2:12pm
Quoting MPP
ok i try to answer all in one go.

i use 5 sma and 50ema on Daily 4h and 1h TF. generally a candle will always touch the 5sma, so if say on a 4h chart it breaks long, normally within 2 candles it will retrace to the 5sma.
now the 50ema shows movements against the trend, say the trend is long and the price starts to fall, it drops through the 5sma, normally it wil \l aim for the 50ema and then start long again, if it passes through the 50ema then we are looking to see the price move futher in that direction.

basiccally i was pointing out 2 or 4 very good indicators of direction.

apply them to some charts and look back to see how they would have worked with your system.

also look for Hakuna Matata in the members list he trades this way.
Cheers for the advice MPP, i understand how they work now.

Quoting hilmy83
I only use support and resistance in my trades. The way I determine to keep away from false breakouts is to have confirmation. Most breakouts that are false usually return to their starting point within 1-2 session. So you could require close beyond the breakout for 2-3 sesssions to confirm that breakout.

Trading does not involve predicting if its a good or bad breakout. We just have to react to the market and trade profitably. Using confirmations with price action is something that I use.
Yes, i've noticed this.

So what your saying is; i should wait for the price to break through 2-3 times in order for me to carry out that trade?, i use the 15min charts, so i'd wait for the candle to pass through at least twice?, hope that makes sense.

Quoting soultrader
I use to be a breakout trader for more than 18 months

FACT: breakouts are only successful about 30% of the time.

FACT:there is no way you can ever know which are false until they are false. No idicator, No MA, no oscillator.

Just accept it - those 30% of trades should pay for the 70% that lose - that's what breakout trading is all about.

of course most traders then go on and close the damn things early for too little profit and let the false ones run into greater loss.

but that's your mental problem.

do it enough and it will come naturally. but accept that you cannot avoid them and embrace each trade as a money management opportunity.

Hope this helps
Normaly what i do is enter on my prices and set my limit order; then just leave my PC and sleep, go out etc., as i get very nervy watching the charts.

Quoting Doji Star
IMHO I feel your R:R is too high. You're risking 30 pips to make 20. You'd be better off with a R:R of closer to 1:1.Please bear in mind I'm not knocking your system, if it works for you, more power to you.
I traded in Gold and Silver futures for two years using a breakout form of trading.The basic idea was to trade the daily COMEX opening breakout, when volume was huge and sudden and then to close all trades when the London ME would close (while New York was still open) because volumes would die down. What a rollercoaster ride this was!! When it worked it was sweet, but when it proved to be a false breakout the hardest thing was to close off the trade. The thing is,apart from nerves of steel, you need to add a reliable volume indicator when you're thinking of trading breakouts.You also need to know your commodity, stock, or currency pair very well. In time you'd be able to get a feel for what it is doing and realise the tell-tale signs of a fake breakout.Like soultrader said, no indicator can help you with this.
Also, and FF is an excellent place to help you with this, I think you may be better served to continue developing a trading system of your own. Let's see, you'll need 1) S/R lines or trendlines or the lines you're currently using(2) a trade trigger or trade confirmation (MACD has become my trigger of choice) (3) clear exit points with a 1:1 R:R (4) something to check price action like candlestick patterns, James 16, and most importantly, (5) trend direction.Trade with the trend.the trend has the power to save you from yourself sometimes! This is just my opinion. There are more experienced traders on this forum that'll give you better advice.
I know I've said a mouthful, but i'm just trying to help.
Wishing you many pips.
Aye, you have said a mouthful lol, but a very good mouthful i might add, i appreciate you taking your time to write such a detailed analysis. I understand what your saying about win-loss ratio, do you reccommend i set my target to 30Pips also?, i think if i was to have clear exit points i could benefit from staying on a trade and getting more pips while sticking to my 30 stop loss, only problem is i don't have a clue about exit points or how i'd go about recognising one, whats R:R?

I truly appreciate all the help im getting on here, im definitely learning a few things to better my Forex education, but of course; i've still got a long way to go.
  • #12
  • Oct 12, 2007 2:52pm Oct 12, 2007 2:52pm
  •  MPP
  • Joined Jun 2007 | Status: Be yourself, everyone else is taken | 2,734 Posts
R:R = risk to reward ratio, currently your risk is higher than your reward.
1:1 would mean either 20:20 or 30:30, same risk to reward amount.
  • #13
  • Oct 12, 2007 3:00pm Oct 12, 2007 3:00pm
Quoting metro


Normaly what i do is enter on my prices and set my limit order; then just leave my PC and sleep, go out etc., as i get very nervy watching the charts.
there you go - limit orders - limit order means you are limiting your profit.

keep doing this and you are doomed
https://linktr.ee/Soultrader
  • #14
  • Oct 12, 2007 3:02pm Oct 12, 2007 3:02pm
Quoting metro
Aye, you have said a mouthful lol, but a very good mouthful i might add, i appreciate you taking your time to write such a detailed analysis. I understand what your saying about win-loss ratio, do you reccommend i set my target to 30Pips also?, i think if i was to have clear exit points i could benefit from staying on a trade and getting more pips while sticking to my 30 stop loss, only problem is i don't have a clue about exit points or how i'd go about recognising one, whats R:R?
R:R is Risk versus Reward.
It took me a long time to get to a place where I could trust my system enough to stick to it, no matter what was going on.So increasing your target to 30 pips is a start. Don't live trade a system you're still working on or getting to know.If you trust your system, you will take the losses because you know your system has a history of more wins than losses, so over time, you know you'll make more money than you'll lose.This is what trading is all about. You will suffer losses,there is no holy grail, but a loss whereby you did everything according to a tried and tested system is easier to stomach.Read my signature below.
PS no need to be embarrassed. You are in the right place. I only wish I found ForexFactory when I started trading.
Keep at it and always protect your capital.Best regards.
  • #15
  • Oct 12, 2007 3:09pm Oct 12, 2007 3:09pm
Soultrader is absolutely right. Many traders, especially trend traders,and those trading off higher time-frame charts let their profits run. To do this you would initially have your R:R at 30:30, but, le's say the trade goes your way and you are currently in the green, you could set your stop to breakeven, giving you a 'free trade' or bumpt it up to the 30 pip profit mark, so that you're guaranteed 30 pips profit. This opens up a whole new can of worms cos your system might do better at a fixed R:R so you'll have to test this out first and see what is more profitable and what you prefer.
  • #16
  • Oct 12, 2007 3:11pm Oct 12, 2007 3:11pm
Quoting MPP
R:R = risk to reward ratio, currently your risk is higher than your reward.
1:1 would mean either 20:20 or 30:30, same risk to reward amount.
Sweet, cheers pal.

Quoting soultrader
there you go - limit orders - limit order means you are limiting your profit.

keep doing this and you are doomed
What do you suggest i do?, let my profits run?...i wouldn't know where to exit im afraid.

Quoting Doji Star
R:R is Risk versus Reward.
It took me a long time to get to a place where I could trust my system enough to stick to it, no matter what was going on.So increasing your target to 30 pips is a start. Don't live trade a system you're still working on or getting to know.If you trust your system, you will take the losses because you know your system has a history of more wins than losses, so over time, you know you'll make more money than you'll lose.This is what trading is all about. You will suffer losses,there is no holy grail, but a loss whereby you did everything according to a tried and tested system is easier to stomach.Read my signature below.
PS no need to be embarrassed. You are in the right place. I only wish I found ForexFactory when I started trading.
Keep at it and always protect your capital.Best regards.
Thanks for your input Doji, after backtesting this system out i found that 20Pips was the better profit take, but im not sure, a bit puzzled now.
  • #17
  • Oct 12, 2007 3:17pm Oct 12, 2007 3:17pm
Quoting metro
Sweet, cheers pal.
Thanks for your input Doji, after backtesting this system out i found that 20Pips was the better profit take, but im not sure, a bit puzzled now.
hey, better now than in the middle of a trade.It's soul-destroying watching a profit turn into a loss.
  • #18
  • Oct 12, 2007 3:38pm Oct 12, 2007 3:38pm
I like the idea of putting my stop loss at my target and let my profits run, that could definitely work.

Im currently trading this system with the GBP/USD and EUR/USD, i think it will work very well with the Euro.
  • #19
  • Edited 4:16am Oct 13, 2007 4:11am | Edited 4:16am
Seems we're not the only traders caught up in the old "let your profits run" dilemma.
Check out this post http://www.forexfactory.com/showthre...14630&page=495 look for post#7420
I especially like this bit: "pips aren't real until they are banked"!!
Cheers.
  • #20
  • Oct 13, 2007 7:55am Oct 13, 2007 7:55am
Quoting metro
Hijacking my thread hehehe. :

don't say that leh........:

i'm not a thread terrorist......sorry anyway.........you're welcome to hijack mine in the future.......
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