Do you know the win rate of the trend breakout strategy?
Well, I tested three separate trend breakout strategies 100 times, and here’s what happened.
Have you ever traded when the price gives a breakout?
Taking breakout trades as soon as the breakout happens after a range market is a bad idea.
When I analyzed 100 breakouts in a previous video, most range breakouts failed to make a good move in the entry direction immediately.
Only taking trades at the retest of the breakout support resistance worked.
But if we take breakout trades immediately in a trending market, what would happen then?
Like, the price has a higher probability of moving in the trend direction.
So, will trading trend breakouts as soon as they happen make money or not?
This is actually one of the popular and oldest strategies.
Many people have been taking breakout trades when the stock market price breaks the all-time high resistance.
Since the stock market is in an uptrend in the long run, this trend breakout strategy makes sense.
But what about the normal trends that day traders and swing traders trade?
Well, I tested the trend breakout strategy on the EURO JPY 30-minute timeframe chart to find out.
I used the 200 EMA for trend direction.
When the price was above it, I saw it as an uptrend and only took long trades.
When the price was below the 200 EMA, I saw it as a downtrend and only took short trades.
I waited for the price to give a small to big pullback in this trend.
In an uptrend, I took a long trade when the price gave a breakout above the swing high resistance.
I set the stop-loss below the swing high resistance.
In a downtrend, I took a short trade when the price gave a breakout below the swing low support.
I set the stop-loss above the swing low support.
I used a 1.5 to 1 reward-risk ratio because that’s the best we have found for trend setups, according to data in a previous testing video.
I tested in the same market structure where I have tested most other strategies on the Trading Rush channel.
This way, we can compare the win rate and other results with other trend strategies we have tested so far.
But there was just one problem.
You see, this setup is great for catching the breakout momentum.
But when we set the stop-loss just on the other side of the breakout support resistance, it many times crosses the entry candle body, something like this.
Why is this a problem?
Well, you see, if we take trades as soon as the breakout happens, then we are taking trades on a running candle.
Even if the candle closes in the profit direction, we don’t know if the entry candle price went in the opposite direction first before closing in the profit direction.
Like, we don’t know if the stop-loss was triggered before the candle closed if we take trades immediately on a running candle.
So, to solve this problem, I did three separate tests.
In test 1, I took trades as soon as the breakout happened and set the stop-loss on the other side of the breakout support resistance.
In test 2, I still took trades on a running candle but set the stop-loss after the entry candle, something like this.
This way, we can clearly see if the entry candle triggered the stop-loss or not.
And in test 3, I took trades at the closing price of the candle, only if that candle also closed as a breakout, something like this.
This way, I knew the entry candle didn’t trigger the stop-loss.
But this also meant that I had to take trades wherever the breakout candle’s closing price was.
It was many times different from the breakout price.
But after taking 100 trades three times with three different trend breakout setups, here’s what happened.
In test 1, since I was setting the stop-loss just on the other side of the breakout support resistance, the size of the stop-loss was small.
And because of that, the 1.5 to 1 reward-risk ratio profit target was also pretty small in distance.
In other words, most of the setups were quick trades.
Many times, the profit target was reached on the same breakout candle.
But there were also times when the breakout happened, and the price reversed and touched the stop-loss.
But overall, there were enough trades that made a profit.
In the first test, with stop-loss on the other side and entry as soon as the breakout happened, the win rate after 100 trades was approximately 52%.
The breakeven win rate is 40% because the reward-risk ratio was 1.5 to 1.
So, a 52% win rate is a really good win rate.
Out of all the strategies I have tested on the Trading Rush channel, only a few got more than a 50% win rate.
But in this trend breakout setup, we don’t know if the stop-loss was triggered before the candle closed.
It obviously didn’t trigger on every setup.
But we don’t know how many it did.
I can’t go to the smaller timeframes and check because the smaller timeframes don’t go that far into the past.
So, this means this trend breakout setup data with this stop-loss is a bit unreliable.
That’s why I did test 2.
This time, something interesting happened.
Since I set the stop-loss on the other side of the breakout entry candle, the stop-loss distance was not as small as before.
Many times, the entry candle was big, and so was the stop-loss distance.
A wider stop-loss distance pushed the 1.5 to 1 reward-risk ratio profit target far away.
Because of this, the win rate actually dropped!
After 100 trades, this wider stop-loss trend breakout only got an approximately 40% win rate.
The breakeven win rate is 40%.
So, this stop-loss rule didn’t make or lose money.
This time, the data is more reliable because we can clearly see if the wider stop-loss or profit was triggered first.
But in test 3, when I took trades at the closing price of the candle that closed as a breakout, and set the stop-loss just on the other side of the breakout support resistance, things changed, but also didn’t change.
I mean, by taking the trades at the close of the candle, I was many times taking trades far away from the actual breakout point.
On top of that, if the candle had already moved big in the entry direction, the stop-loss distance was becoming big.
So, once again, I was in a similar situation to test 2.
And just like the test 2 results, this late entry and wider stop-loss breakout setup only got around a 39% win rate.
That’s around the breakeven 40% win rate.
So, according to the previous testing video data, most range breakouts fail.
The price doesn’t make a good move in the entry direction immediately.
But according to the 300 trades tests we just did, even in the trending market, things get tricky.
If we set a wider stop-loss or take trades on the closing price, then the trend breakout only gets around a breakeven win rate.
But if we take trades immediately and set a narrow stop-loss just on the other side of the breakout support resistance, then it gets a really good win rate.
But this good data was also a bit unreliable, as we had to take trades immediately on the running candle and couldn’t see if the stop-loss was triggered before the entry candle closed.
Maybe I will do a test in the live market in one of the future videos to solve this problem.
But so far, from this and previous breakout testing videos, the only two breakout strategies that have worked according to data are retest of the breakout, something like this,
and taking trend breakout trades immediately with stop-loss on the other side of the support resistance.
That’s all!