System 1: Busted Breakout Profit by Hunting for Other Peoplesí Stops!

 

 

by Gabriel Grammatidis


Your search for the Holy Grail system should focus on designing or finding the system that really fits you (see my article Systems Need to Fit!). What do I mean by a system that really fits you?

Define your trading game

Van teaches that each of us creates our own “reality“ and as a result, you actually play the “trading game“ according to your own rules. Of course, most people are not conscious of this process. The idea, however, is not all that complex. With the rules you choose to trade by, you basically decide what, when, how and how often you trade. You also pick…

  • the time of the day in which you perform best
  • the trading timeframe (you feel neither bored nor stressed-out) as well as
  • the amount of time you have available for trading in a professional way (eg after work only).

If you understand your answers to those questions, you will find a system to trade that fits you really well. Trading a system that fits you creates an advantage compared to other market participants who trade systems that do NOT fit them.

Defining rules for yourself will naturally lead you to a trading system, an asset class (eg Forex, equities) and a timeframe that suits you best. Be aware, you do not have any “control” in the capital markets — but you are getting paid exactly for this — taking on risks and managing those risks in an uncertain environment. So focus on what you can control by carefully defining your “trading game” in a way that helps you win. Unfortunately, once you have chosen your set of rules, there is no one else to “blame” anymore!

As a general rule, you will know when everything fits you if you feel good during your trading. Are you relaxed and convinced that you are doing the right thing? And most of all, do you have fun doing so? By “having fun”, I don’t mean that every trade wins, it is actually independent of winning or losing trades. If you do not enjoy yourself trading the system during times of “losing” as well as “winning”, then that system is probably not the right one for you.

Talking about having fun: who does not know the feeling that comes from having your stops be taken out by the market? Being taken out with a loss and seeing how the market turns immediately thereafter in your originally intended direction could trigger many emotions — but probably not fun. Just imagine, however, how much fun you could have taking the trade in the other direction, experiencing the same stop runs except this time in reverse — you profit from those same market situations. Based on experiences of having my stops getting hit in breakout patterns, I created a system that wins from these breakouts that fail. For this reason I call this system Busted Breakout (System 1 of the three taught at the workshop this month).

Busted Breakout

General Description

The system can be described as a trend-following system that capitalizes on a specific pattern of breakouts that have a high likelihood to fail. It is a pattern recognition system based on the psychological dynamic of buyers and sellers at a certain price level. This dynamic builds up over time which is then detected as a “psychological footprint” in the timeframe you execute the trade (see former article “Reading Psychological Footprints”). Reading these “footprints” requires some experience & intuition but a good lesson from an experienced trader can accelerate the learning process greatly.

This system requires a pattern with the break of a specific price level at a specific time. To determine the right timing, higher timeframes are used and moving averages are watched for certain dynamic support levels. Monitoring the higher timeframes plays an important role in increasing the reliability of this system - which has a win rate of about 65%.

The system works well for any FX pair and with other liquid instruments such as Equity Futures, ETFs or even stocks. Due to the fractal nature of markets, it can be traded in any timeframe going both long or short. The system offers a set of clear rules with a precise entry level and initial stop. This allows you to enter pre-set orders into the market without having to wait for the exact minute of the breakout. For information on statistics on this system please refer to the Van Tharp Institute workshop description regarding win rate, average expectancy, opportunity and SQN (http://www.vantharp.com/workshops/forex.asp).

Main Beliefs

One of the main beliefs behind the system is that many market actors underestimate trends. This occurs regularly in two phases: aging trends and trends that just turned (early reversal mode). During these two phases of trends, countertrend traders are attracted to take market positions against the primary trend. As hard as they might, trying to force the trend to turn around does not work in most cases.

Typically, these countertrend traders are either:

  • novices looking for excitement in trading (countertrend trading) or
  • traders with big egos who try to be “proven right” by picking tops and bottoms of a trend (ego bias).

As these kinds of traders have a high chance to get their stops run, you should actually be on the other side of that trade. So many traders forget what this system remembers - that trends run further than you might ever expect. It seems to be a universal rule in capital markets that whoever has a lack in humility will be taught that lesson — as many times as required!

Another belief supporting this system is that most breakouts actually fail (around 80%). Why is this so? I believe that the trading crowd finds it very easy to spot and trade breakouts. As you know — only a few participants are allowed to be successful in the markets and usually this is not the crowd. If you want to trade consistently and profitably, you should actually focus on things that seem counter-intuitive initially — which is a reason why they might work. The Busted Breakout is such a strategy that plays the human psychology to your benefit.

Low-risk idea behind the system:

The core of the low-risk idea is that you should wait for a specific charting situation setting up in the market. This is a breakout against trend direction that fulfills a number of additional criteria setting the stage for the novice or ego trader to fall into the Trader-Trap. In practice, you stalk the trade and at the moment when the Trader-Trap snaps shut, ie when the countertrend-breakout starts to fail — you enter. Countertrend traders realize now that they are in a bad trade and experience slight (or major) emotional panic while allowing you to trade in trend direction. This all happens in a very relaxed way for you as you know that the Trader-Trap works in your favor. When the first breakout traders have to exit their positions in pain, you should actually be entering then to run the stops of the remaining traders. This action typically generates an initial price spike which brings you to a risk-free position (stop moved to the entry price) near the start of the trade followed usually with additional movement in original trend direction.

Does this kind of trade sound fun to you? For me it remains fun because I find the pattern setting up regularly nearly every day — be it the Forex market, equity indices or commodities…

Good trading,
Gabriel Grammatidis

About the Author: Gabriel Grammatidis is a successful full-time trader and graduate of the Super Trader program. He has extensive experience trading Forex and shares his knowledge at his Forex and Live Forex Trading workshops, held regularly at VTI.

For more information on the system please refer to my Traders’ article (Become a Hunter).

As well check out my website at IntuFX.com about the Busted Breakout system for articles (http://intufx.com/busted-breakouts-in-forex/) and trading videos (http://intufx.com/trading-videos/). For a free 30min webinar on this specific strategy sign-up at IntuFX.com for the webinars’ free download.

 

 

 

 

 

Back to the Top
919-466-0043
919-466-0408     [fax]
Toll Free:
800-385-IITM  or  800-385-4486
Van Tharp Institute
Van Tharp Institute
View Our Site Map
Register For Tharp's Free Newsletter
102-A Commonwealth Court
Cary, NC 27511 - USA
email: info@vantharp.com
  © 1996-2017 IITM, Inc or its affiliates. All Rights Reserved
Van Tharp, Van Tharp Institute, Van TharpeLearning, Position Sizing, and IITM are trademarks of IITM, Inc in the United States and elsewhere.
SQN is a federally registered trademark of IITM, Inc
Terms & Conditions - Privacy Policies