How to Build Effective Breakout Strategies
Breakout trading strategies are one of the most popular and effective types of strategies for many different markets. I thought enough of them to name my first trading business — Breakout Futures — after them. By their nature, breakout strategies are trend-following. They buy or sell when the market breaks above or below a specified price level under the assumption that the market will keep moving in the direction of the breakout. The price levels can be thought of as channels, so these types of strategies are also referred to as channel breakout strategies.
This article discusses the main issues involved in building breakout strategies and demonstrates how to build reliable and robust breakout strategies in Adaptrade Builder, a trading strategy generator. Several different types of breakout strategies are shown, and the strategy code is provided below for each one.
Elements of the Breakout Strategy
All trading strategies should include the following basic elements: (1) entry rules or conditions, (2) rules or conditions for exiting at a profit, and (3) rules or conditions for exiting at a loss. Position sizing and other risk management methods can also be considered, but since these methods are not usually part of the strategy's trading logic and can generally be added after the strategy is developed, I prefer to consider them separately from the strategy itself.