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TW reader Gustav writes:
Why do traders need to wait on the breakout of a signal bar to enter a trade? What is so magical about it? Why not if you are so convinced about certain price action, to enter blindly at a much better spot?
JS comment:
Well, as far as this trader is concerned, there is nothing “magical” about a breakout bar at all. Some traders use breakout bars as an entry criterion aspect of their methodology. Others don’t. There are plenty of reasons and rationales for entering a position.
If a trader were “convinced about certain price action,” then it would indeed be illogical to wait for a breakout. Upon being convinced, you should be in the trade. But, for many traders, the whole point of the breakout bar is that the breakout is what “convinces” them to take action in the first place. No breakout, no conviction.
“Enter blindly at a much better spot” seems a contradiction in terms. If you are entering blindly, how do you know the spot is better? In most cases of breakout entry, the purpose of the breakout is to ensure forward movement – to increase the probability that the vehicle (stock, currency, futures contract etc.) continues to move in a desirable direction, as opposed to being stuck in a sloppy range.
Whether you use breakout bars or shun them, a key task is making sure you understand the reasoning behind your rules. All trading and investing is done via some combination of rules and pattern recognition, whether consciously or subconsciously.
Take the value investor who never looks at charts, for example: He will still have internal rules for determining what makes a good investment. If he ignores the charts, he will still be looking for “patterns” – ratios, clues, rates of change etc – in the composition of the balance sheet, possibilities for an event catalyst, scenario developments he has seen before, etcetera.
Finally, if you ever question the logic or efficiency of one of your own trading rules, consider modifying it, or even throwing it out completely. There is no harm in tinkering on paper, and possibly much to gain. Conduct thought experiments, manually backtest if you can. If you decide breakout bars are an illogical means of entry for the way you trade, perhaps you will find something that works better for you.
Just make sure your rules are consistent and coherent within the methodological framework you have created, and that you understand the reasoning behind every action you take. If you don’t, that is good reason to investigate.
Disclosure: This content is general info only, not to be taken as investment advice. Click here for disclaimer
Why do traders need to wait on the breakout of a signal bar to enter a trade? What is so magical about it? Why not if you are so convinced about certain price action, to enter blindly at a much better spot?
JS comment:
Well, as far as this trader is concerned, there is nothing “magical” about a breakout bar at all. Some traders use breakout bars as an entry criterion aspect of their methodology. Others don’t. There are plenty of reasons and rationales for entering a position.
If a trader were “convinced about certain price action,” then it would indeed be illogical to wait for a breakout. Upon being convinced, you should be in the trade. But, for many traders, the whole point of the breakout bar is that the breakout is what “convinces” them to take action in the first place. No breakout, no conviction.
“Enter blindly at a much better spot” seems a contradiction in terms. If you are entering blindly, how do you know the spot is better? In most cases of breakout entry, the purpose of the breakout is to ensure forward movement – to increase the probability that the vehicle (stock, currency, futures contract etc.) continues to move in a desirable direction, as opposed to being stuck in a sloppy range.
Whether you use breakout bars or shun them, a key task is making sure you understand the reasoning behind your rules. All trading and investing is done via some combination of rules and pattern recognition, whether consciously or subconsciously.
Take the value investor who never looks at charts, for example: He will still have internal rules for determining what makes a good investment. If he ignores the charts, he will still be looking for “patterns” – ratios, clues, rates of change etc – in the composition of the balance sheet, possibilities for an event catalyst, scenario developments he has seen before, etcetera.
Finally, if you ever question the logic or efficiency of one of your own trading rules, consider modifying it, or even throwing it out completely. There is no harm in tinkering on paper, and possibly much to gain. Conduct thought experiments, manually backtest if you can. If you decide breakout bars are an illogical means of entry for the way you trade, perhaps you will find something that works better for you.
Just make sure your rules are consistent and coherent within the methodological framework you have created, and that you understand the reasoning behind every action you take. If you don’t, that is good reason to investigate.
Disclosure: This content is general info only, not to be taken as investment advice. Click here for disclaimer