Conservative breakout trading

Our style of trading has progressively moved to conservative breakout and where we compound our traded amount daily.

Even on the 5-minute charts, this approach provides for few entry opportunities. But as we are trading at our maximum amount ( after we have established that we are consistently profitable), this is not an issue.

The compounding aspect missed by most traders but is a most powerful aspect to the methodology. 

Our method lends itself to observing a few charts at once (three to four). However, we only have one entry open at any one time.

The pointers below provide suggestions on setting up the charts and for the daily calculation of trade amount per pip.

Chart set-up

The four markets below fit the screen better than three. We use the top left (EUR/USD) as our anchor screen. That is we scale every other display in proportion to the anchor screen.

Four markets fit the screen better than three.

To do so, we manually adjust the ‘price’ axis to provide the look that we need. For EUR/USD this is a width of about 100 pips. The other screens scaled accordingly.

A low vertical scale density works best.

Our method is for a fixed stop and target providing an essential and consistent 2:1 reward risk. (adjusted for spread). Again, using EUR/USD as the template, we scale the other charts accordingly as a percentage of their opening price for the day.

The candles seem tighter than most will be comfortable but with a little practice, it quickly becomes apparent why this less volatile appearance is more suitable to the conservative breakout trader.

Risk level

EUR/USD example

We trade a single market at any one time and, therefore, a single price level. In this regard, we can be accurate with our amount per pip. Take the example of our favoured market, EUR/USD. At the start of each trading session, we calculate our amount per pip which, unless the market makes a significant price difference, is maintained throughout the day.

Assumptions for the example: market value 11,640, margin 3.33%, equity 15,000 (50% of equity 7,500) and overall risk not to exceed 2% of equity. Note: we use 50% of our equity as we are looking for a margin during any one trade to be very close to the 50% mark.

EUR/USD 10.8 pip stop.

Margin at 3.33%       11,640 x 0.0333 = 387.6    then    7,500/387.6 = 19.3 (price set per pip)

2% check         A: 15,000 x .o2 = 300 (max risk)    B: 19.3 x 10.8 (stop distance) = 208.4

The 19.3 in the example above is our amount per pip. In the 2% check, ‘B’ is not to be greater than ‘A’.

Note that (as is the case with AUD/USD) a market with a margin of 5% then the margin calculation above would be multiplied by 0.05 rather than 0.o333.

In our fledgeling expert period, we complete the daily calculation but trade quarter of the amount and increase in quarters as we become surer that we can fly.

When entered into a trade using the amount per pip as calculated above margin will go a few percentage points against us if the deal is negative and vice versa if positive.

 

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