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Contents
About The Author..................................................................................................................................... 3
Buy Rule:........................................................................................................................................................................ 5
Buy Rule:........................................................................................................................................................................ 7
Conclusion ................................................................................................................................................ 10
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Trading Research: How to Find the Best Breakout Trades
Rayner Teo
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Trading Research: How to Find the Best Breakout Trades
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Trading Research: How to Find the Best Breakout Trades
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.
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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
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).
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Trading Research: How to Find the Best Breakout Trades
Wow.
This beats (almost) every metric of our earlier strategy…
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Trading Research: How to Find the Best Breakout Trades
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.
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