False Breakouts – The Main Enemy of Trend Breakout Trading!
A trader places pending orders around a certain range to enter on a breakout and continue in the direction of the movement. The price hits one of the pending orders and deviously flies in the completely opposite direction! Sound familiar? Completely defeating a false breakout without clairvoyance is impossible. The good news is that you can reduce the number of false triggers!
It’s quite simple. Which pending order does the price usually hit? The one that’s closer. This is a major pain for breakout traders! Sometimes you have to place the pending orders so close to the current price that one of them is uncomfortably close. That’s exactly what a malicious false breakout hunts for! A trend doesn’t start immediately; at its inception, the price is often jittery and “twitchy.”
Here’s a hack applied in EDVI trend strategies: Pending orders are placed so that the size of the range is maintained, but both orders are equidistant from the price.
To do this, measure the width of the market segment to be covered, divide it by two, and place the pending orders at that distance.
Example: My strategy dictates that I need to cover Ethereum: sell below $3000 (for further decline) and buy above $4000 (for growth). Right now, Ethereum is at $3100. I understand that the price can easily move by a hundred, trigger a short pending order, and then it’s up to chance. At the same time, the activation of a long position is complicated by how far it is. I make both events equally likely. I calculate the size of the range (4000 – 3000 = 1000), divide this thousand in half, and place the orders $500 below and above the current price – short from 2600, long from 3600. Simply distancing one event and bringing another closer does not magically increase our profit factor! But we filter out the parasites in the form of false breakouts. This, in turn, increases the profit factor.
Halving the range works great in trending markets (like crypto). Tested over the years and with significant personal funds!
