Trading Research: How to Find the Best Breakout Trades

Contents
About The Author..................................................................................................................................... 3

Here’s The Thing: ...................................................................................................................................... 4

How The Trading Research Works .................................................................................................................... 4

Trading Experiment 1: Breakout Trading Strategy .......................................................................... 5

Buy Rule:........................................................................................................................................................................ 5

Exit Rule: ........................................................................................................................................................................ 5

Backtest Settings: ..................................................................................................................................................... 5

Here Are The Results… ............................................................................................................................................ 5

Trading Experiment 2: Breakout Trading Strategy With A Buildup ............................................ 7

Buy Rule:........................................................................................................................................................................ 7

Exit Rule: ........................................................................................................................................................................ 7

Backtest Settings: ..................................................................................................................................................... 7

Here Are The Results… ............................................................................................................................................ 7

So How Can This Improve Your Trading Results? ............................................................................ 9

Conclusion ................................................................................................................................................ 10

Do You Want More Stuff Like This? ................................................................................................... 10

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 Trading Research: How to Find the Best Breakout Trades

About the Author

Hi, my name is Rayner Teo.

I’m not a multi-millionaire trader, I don’t drive fancy cars, and I don’t live in a
penthouse.
But I am an independent trader, an ex-prop trader, and the founder of
TradingwithRayner.
I specialize in studying great research (from people much more qualified than me)
and applying it to the real-world of trading to find out what works and what doesn’t.
And finally, share them with traders like you so you can become a consistently
profitable trader.
Cheers,

Rayner Teo

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 Trading Research: How to Find the Best Breakout Trades

Here’s the thing:

Not all breakouts are created equal.
Some breakouts quickly fail and reverse in the opposite direction whereas some lead
to trending markets that last a long time.
So the question is…
How do you know which are the best breakouts to trade?
Well, that’s what you’ll find out in today’s research.

How the trading research works

1. I’ll backtest a trading strategy that buys breakout with the largest price increase
2. I’ll backtest a strategy that buys breakout with a buildup
3. Compare the results of the two trading strategies
Read on…

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 Trading Research: How to Find the Best Breakout Trades

Trading experiment 1: Breakout trading strategy

Buy rule:
Go long when a stock hits a 20-week high

Exit rule:
10% trailing stop loss

Backtest settings:
◉ Transaction Costs: $10 per trade
◉ Test universe: Russell 3000 stocks
◉ Execution: Market open
◉ Maximum open positions: 20
◉ Test period: 2000 - 2017
◉ Positions size: 5%
Sometimes, we’ll get too many stocks to buy.
So, I’ll choose the 20 stocks that increased the most (in price) over the last 20 weeks.

Here are the results…

Number of trades: 3564
Winning rate: 44.5%
Profit factor: 1.37
Annual return: 12.88%
Maximum drawdown: 65.37%

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 Trading Research: How to Find the Best Breakout Trades

Overall, this breakout strategy is profitable but it comes with a steep drawdown of
65%.
Next, let’s see if we can improve on our breakout trades by waiting for a buildup…

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 Trading Research: How to Find the Best Breakout Trades

Trading experiment 2: Breakout trading strategy

with a buildup
Buy rule:
Go long when a stock hits a 20-week high

Exit rule:
10% trailing stop loss

Backtest settings:
◉ Transaction Costs: $10 per trade
◉ Test universe: Russell 3000 stocks
◉ Execution: Market open
◉ Maximum open positions: 20
◉ Test period: 2000 - 2017
◉ Positions size: 5%
Sometimes, we’ll get too many stocks to buy.
So, I’ll choose the 20 stocks that have the lowest volatility over the last 20 weeks
(otherwise known as a buildup).

Here are the results…

Number of trades: 788
Winning rate: 58.50%
Profit factor: 2.69
Annual return: 10.68%
Maximum drawdown: 36.69%

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 Trading Research: How to Find the Best Breakout Trades

Wow.
This beats (almost) every metric of our earlier strategy…

◉ The number of trade has decreased

◉ Win rate has increased
◉ Profit factor increased
◉ Annual return decreased
◉ Maximum drawdown decreased
And it easily beats the S&P 500 with lower risk.

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 Trading Research: How to Find the Best Breakout Trades

So how can this improve your trading results?

Easy.
You want to trade breakouts with buildup.
The lower the volatility prior to the breakout, the better!
Here’s an example of a breakout with buildup:

Now you know why I keep saying trade breakouts with a buildup.
Because it works and the numbers don’t lie.

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 Trading Research: How to Find the Best Breakout Trades

Conclusion
You don’t want to trade breakouts when the price has moved a lot prior to the
breakout level.
Instead, it’s more profitable to trade breakouts with buildup as it increases your
returns while reducing your risk.
And there are a lower number of trades which means lower transaction cost and more
net profit.

Do you want more stuff like this?

Then check out my website, TradingwithRayner because you’ll learn

new trading strategies and techniques to level up your trading.
There’s no hype or fluff but only the good stuff.
Here’s the link: www.tradingwithrayner.com

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