The Only Real Edge: Trading from Breakeven

I'm only using the DOM on Nikkei futures (N225M) at the moment. Might branch out into currency futures later but I want to master one market at a time. I use spot for longer term trades at the moment.

The DOM I use is part of the platform which is provided free by my broker (Interactive Brokers). I have no knowledge of MT4, sorry. The DOM, called BookTrader, is pretty good but has one serious limitation. It doesn't show the volume of orders hitting the bid and ask separately, but only the total volume traded at that price. That's because IB's data isn't true tick data, and instead is a series of snapshots containing the accumulated orders within each split-second period. It really would be nice to see the separate bid and ask volume but without switching to Ninja and a better data feed (e.g. Kinetic) it ain't gonna happen. At the moment I'm getting round it by watching a very-low-timeframe chart with volume bars next to the DOM. You can get a pretty good feel for how much volume is hitting the bids and asks just from that.

I'll respond to your next post later... stuff to do now

Looks like there is a One Click Trader.dll file needed too. Can you share that as well please?

I don't see one in the Experts folder, just the file I shared. It may well be that this tool is specifically included in my broker's platform, the other files could be embedded or hidden somewhere. So sorry if this has been of little use. Anyway, there are definitely many similar tools like this available from some coders and brokers, try looking around, you'll surely find something. My idea in sharing this was just to show what is useful in terms of technical setup for tight scalping and that it needs to be automated for at least for the very initial moves after entry (because sometimes price level is not touched more than once), but there are different solutions available.

Yep, this excellent post pretty much sums it up, at least how I see it right now. I think it's almost impossible to differentiate between a false breakout and a true one (start of trend) just before or at the exact moment it's happening. The big player who started it and takes profit after the first big move is just one part of the equation. Even they don't know how the other big players, and even the smaller ones (because many small traders thinking the same thing is the same as one big player), will react to the breakout. If other big players step in then it will continue. If they perceive it as a great time to initiate an opposite position then it will reverse. At that point the original player, just like the rest of us, will have to decide what to do based on the information they have. They might even do nothing, because they've already made a bunch from the breakout they started!

Breakouts are tricky, there's no getting away from it. Like you said, even successful ones sometimes look like they are going to fail before they carry on. It all depends on what the big players and, to a lesser extent, the retail traders do after the initial move. Can we use the DOM for guidance on this? I think that with a lot of practice we'll be able to read which side is winning the battle, and either stay out or enter with minimum risk. The easiest breakouts are those which just hang around for a minute or two on low volume before they continue, so for even less risk we could trade only those.

These are just my initial thoughts on it, and could well be wrong! It would be great if an experienced DOM trader could shed some light on this.

The Only Real Edge: Trading from Breakeven
At last. I look forward to reading more.

In the meantime this might help. PDF instructions for how to use the "One Click Trader". And a zip version of "One Click Trader" I downloaded from a broker, it works on my platform. I have seen it available from many other brokers you just need to dig around in their sites.

dee50, thanks for the links!

The idea of exiting trades at breakeven to avoid having a loss... sounds good in theory. However, in reality I think it does more harm to your results than if you would just let your trades completely play out to either a win or a loss. Have many of you - as I have - received the email awhile back from a very successful professional Futures trader named Ziad Masri in which he had a video of very good trading advice? As with all the random trading videos we get in our email, we are asked to purchase something at the end (in this case his trading course). I had no interest in Futures trading or purchasing his course, but the free trading information he gave in his video was very good. One of the things he talked about in the video was a discussion about exiting at breakeven and whether or not it was a good idea. I wrote down in a Word document what he said about the idea of exiting at breakeven (I also transcribed his other advice in the video as well). I will copy and paste it here:

He says he kept track on an excel sheet for several months of the trades he exited at breakeven to see if he would lose money or make money by trading that way. He said his results showed that it ended up costing him money. He said:

"The reason why is that if you're getting in for nice reward to risk trades, where youre risking (for example) 2 points to make 6 points, fine its great when you save 2 (edit: keep in mind he is a Futures trader and not a forex trader. Thus, he trades "points" instead of "pips"). But when youre wrong, you miss out on 6. So overall it's going to cost you a lot of missed profits and overall it's going to just cost you a lot of money to do it, when you do it this way. I mean, think of it this way: I'm going to give you a reverse logic that's going to let you see this much more clearly. Would you ever take a trade where you had to have a 6 point stop, a really wide stop, and only 2 points of profit potential? Well I sure wouldn't. And most traders wouldn't either. But essentially that's what you're doing when you're scratching a trade here (edit: in the video he points to his example trade on the chart). You're basically trying to save 2 points i.e, trying to make 2 and you're risking your 6 point profit to save this 2 points. So it''s this inverse reward to risk and it really just hurts your bottom line."

"So the first rule of thumb is that if you have a really good reward to risk and your holding for a bigger move, it almost never pays to scratch out or get out at breakeven even if it looks like your trade is completely failing. It almost never pays, because half the time it won't fail and half the time it will and overall its just going to cost you a lot more."

So, is using breakeven as a part of your trading plan really an "edge"? As professional trader Ziad Masri explained and has experienced first-hand, exiting at breakeven initially seems like a good idea, but overall you are more likely to lose money in the end.

The Only Real Edge: Trading from Breakeven

The only way this makes sense is if you are trading extremes (buy low, sell high)

I've seen Ziad's video, but how do you know he is very successful? He only shared some selective results in the form of a few account statements, not his full account history or equity curve . All educators do those tricks. But yeah, Ziad's course looks really interesting, I'd love to take it when I have 2K to spare.

The approach I'm trying to explore in this thread is a bit different and does not contradict what Ziad says, i.e. that you have to be in a position and run swings for good risk-reward ratio. But it is more about position management from the defensive breakeven perspective -- what guys like FT71, Guy Bower and John Grady are practicing and teaching. This does not mean you necessarily abolish your trade idea once stopped out at BE and go to weep as if you were stopped out for a big loss. No, you actively trade levels -- tight ranges and their fakeouts in effect -- to build a position for your swing trade. If you think your idea valid, you can re-enter after the stopout depending on how the market behaves. You may be able to re-enter at a better price, or you may have to chase it a bit if you feel that swing still coming -- it all depends on what the localised price action looks like. Having said that, think about it -- there's no guarantee your 2 point stop (i.e. 8 ticks/pips, which is always within market's reach) will not be taken out before that swing still happens... The market doesn't care if it's at breakeven or a loss that you are stopped out, but you better do. This kind of tight play is only possible when watching DOM and the tick chart. I think there are many misconceptions that originate from just analysing markets on the chart retrospectively. I will try to address those in my coming posts.

A little example of this approach from today: on bar 1 faded a micro range on tick chart, netted 40 pct at 2 pips and set to breakeven. On bar two, added to the long, but it was a micro fakeout I took, on bar 3 scaled in with a two pip stop, when the price got to the bar 2 entry I exited it, took a pip's profit on the bar 3 entry and set it to BE. It went in my favour, moved the higher entry's stop to 4 pip profit, which was taken out on a pullback; still keeping the initial entry for a swing, which I now think will not happen, but who knows... it may still happen and run 20 pips or more in total. What's important in this case is not to chase or initiate any other trades before the actual risk sustained or cost of entry has been exceeded by a at least 1:1.5 by open profit. Once that is reahced, you can lock in the profit and take it from there.

Exactly! You always want to identify a range and enter where others are being stopped out and trade that range. But even in a trend the same principle applies -- if you watch the tick chart, every trend consists of smaller ranges, so you can always get onto a trend after a few attempts on those micro ranges. The same principle applies. What is important to realise is that there is no sure-fire way to enter into the market in any circumstances, ever. There is always a high probability that your entry point will be tested at least once, which means a micro range, which means you gotta trade that range at least at breakeven (i.e. micro scalp for cashflow in case you are stopped for a couple of pips sometimes) in order to be profitable.

Incidentally, in trends entries from these micro ranges are even safer because of the momentum, only traders are often afraid to chase or go for breakouts. They look at the chart and think it's too high to buy, let's wait for a pullback. But the pullback often does not go more than a couple of pips on the tick chart before there's another three pip run, then a pip's pullback and then another two pips run, then a three pip pullback, and then an eight pip spike, and on an on.

to follow up on the example of today -- I've set the stop below two trending bull bodies on 5 min -- if they don't hold the support for the breakout, the range may expand to run chasing bulls' stops. On the flip side, the bulls are now going for the breakout, but really for the stops of those bears who tried to fade this move, and possibly the swing stops above the previous swing highs, which is easy prey if there's no aggressive shorting, and the trending bodies show there hasn't been. But you never know when heavy bears will step in, so you better lock in those profits with a tight trailing stop.

Great thread, I will be following with interest. Thank you!

Thanks to all for your comments, Im glad this thread is provoking some discussion. I know that this concept runs against some conventional wisdom taught by conventional fx education. So Id like to share some thoughts why I think this is the way to trade. I think this is the way institutions trade. The market consists of two parts the inside market, i.e. the current at market trading within 2-5 ticks, and wider market structure, i.e. the positions of profit-holding and loss-holding players (strong and weak hands).

And whilst institutions and market movers will make decisions on potential entry and exit points to maximise profit and minimise risk/losses, whenever they enter the market, their position becomes the target of other equally strong institutions trying to make money off them, if only for a few ticks and every entry is being fought out with a view to trailing on from BE+ . I believe institutions do hold very large and very long term positions, but most of institutions positions held are breakeven+ positions, which they look then to protect on retracements or to scale out on runs. Institutional trading is dictated by the Value Weighted Average Price concept, which is something FX traders are not aware of, but which is a key indicator for pros, reflected in platform setups and broker reporting. Which in effect presupposes the prevalence of range trading when it comes to making money.

So, lets look at the tick chart and think about what is happening:

1. The tick chart is the inside market, which is displayed in the 2-10 pip range, depending on volatility;
2. EURUSD, for example, turns over USD 2.5 trillion a day, 2/3 of this volume is probably done within 12 hours or so, so do your math: 2.5tri * 2/3 : 14 / 60 / 60 / 100K = 330 contracts a second. So you can imagine 300 contracts worth 30 million hitting the bid and ask at every second as you watch the tick chart. Do you think much of those positions are left to float beyond a 4-pip stop? Well, such generous institutions would go out of business pretty quickly and would have to go trading retail...
3. When you watch the tick chart, you see the same chart patterns as on the daily chart, only on pipette level. And the market will go where it will, and the wise and lucky who got something left as it leaves the current range will be in profit, others will be getting out around BE or with tiny losses only to re-enter somewhere else.
E.g. on this tick chart you see A driving to B, dipped below B, the spread stayed tight, meaning bidders still willing, dropped just a bit to D after a small double top, spread still tight, meaning bidders still there, moved to half a measured move to E as B/C exited at market and some were stopped out, stayed there as it met only passive limit order but no market sells, and drove to F, probably to flush the tight stops of those limits on the way, and on and on. Watching just the price chart is like forensic science trying to uncover where potential stops and liquidity vacuum may exist and how market structure is unfolding, but only the tick/DOM will tell you what is really happening right now. You see market movers actual entries and exits there they are using this data to time their market actions, and retail traders think theyll outsmart the institutions by burrying their head in the sand of wide stops.

I have another example to prove that this kind of entry works not only in ranges, but in chasing trends as well. Today we had a big EU spike, flushing out bears from earlier in the day. Of course somebody should be unloading into their stops and I tried to fade it carefully. Got a short scalp, tried to add on to it, but had to scratch, which signals that there are still buyers and more early faders' stops above the fresh high of the day. Okay, I switched to long, took two pips and am now riding risk free for the breakout whatever happens. Probably this will not give me more than a few more pips, but it may, who knows...

follow up: well, it didn't, but not to worry.

Wanting to be right and good at prediction and taking stopouts as personal insults is not a good trait for someone who trades. Better Wrong But Breakeven.

Spread and commission when playing that tight, even if very low, eat a large amount of your profit so you are not playing against a near 50/50 probability to make profit or lose but against 60/40 or more. Very dangerous to trade this way. Not for beginners.

Besides that you explained very well the market structure, wich is basically the same from tick charts to larger timeframes charts.
But if you don't use DOM on markets that allow that, why the need of playing that tight with high % spread/commissions on your profits? For the tick chart? It doesn't give much more informations than the candles compared to a good DOM based platform.

hi Ainur, appreciate your feedback. Yeah, beginners be better off trading with wide stops and then martingaling to compensate -- but has anyone made money this way? Lol.

spreads now are no more than half a pip, commission as much, so transaction cost is 1 pip, if you get two pips in favour, you're one pip in profit, if you take some off, you're breakeven overall. And that's exactly what you see on the dom or tick chart. True, lack of dom in fx is a drawback, but my idea in this thread is exactly to try to see hiw that lack can be overcome.

The truth is nobody knows for sure what will happen next, and when the next happens, the dominant players will drive the weak hands out at a loss. If you stay with a weak hand, you can almost certainly forget profit. Martingale? Only good to return to the same BE, but at huge risk, which will turn into losses, because there is a stop in the market after all, isn't there? Ignoring risk does not eliminate it. Good trading!

Did I ever talk about martingale and wide stops?

Beginners better play on a somehow larger timeframe than the tick chart, because the smaller you go the larger are the costs of a trade compared to your profits. thats it.

I was just asking you why play that tight without DOM if the same dynamics apply on larger scale with less costs. If there is a specific reason or it's just your personal preference.

I don't know if you felt my question hostile, because it was not intended.

No, not at all, sorry if my answer sounded hostile I'm just thinking about the other alternatives (based on bitter experience, too) -- martingaling and higher timeframes as you say. Higher timeframes may be less intense and the dynamics are similar, but there is no escaping from the the inside market once you decide to put on a trade. As market profile authors said, every multiday swing trader becomes a day trader when needing to enter the market, and every day trader becomes a micro range trader when needing to place a trade as well, if you carry that logic further. I will try to explain what I mean in the next post, but atm I need to leave for a while. Will keep in touch on this.

The reason is the same as the reason behind every multitimeframe zeroing-in sniper-style strategy: to minimize risk and maximize return and risk reward. Because every setup and signal that looks good to those whi beliwve in it looks equally good to those who will try to fail it or profit from stop runs. Meanwhile the cost if trading is primarily stopouts, not commission, so it is stopouts that hurt accounts. If one trades the 60 min chart, stops can be like 20 pips, and to get 40 pips as reward on a single trade is unrealistic on most days. In my experience this counts more like a fantasy . While 20 pip stopouts are very common . If you zoom in on the same setup, the cost can be largely reduced through frugal tight entries. I am not talking about blind trading on the tick chart, but on zooming in when there is a higher timeframe reason to trade. But most importantly trade from a breakeven position and cut losers. Once you start playing, the setup is not so important, it may or may not work in the end, but you tread carefully and protect yourself.

One more reason is that position size can be much larger when trading tight.

Ok, got it. I agree with most of it.