Trend Trading Set-Ups: Entering and Exiting Trends for Maximum Profit

CHAPTER 7

Breakout and Retrace Trade Set-Ups

In Chapter 5, Table 5.2 considered the various probabilities surrounding breakout and retrace trades. Although the original intent was to focus just on the failure probabilities associated with the various retrace and breakout situations, as with any probability data, there is a mean as well a variance and thus outliers. Unlike many studies, the outliers in this study actually ended up being quite useful because they were representative of potential trading opportunities that hold great promise.

For example, it was shown that most swing point breakouts tend to come back quickly for a retest and regenerate sequence. Given this observable fact, one could ask if there is something in common for those cases that do not retrace within a few bars. If so, that would represent opportunity, and indeed the material below considers slow retrace trade set-ups and breakout trade set-ups as a result of studying the similarities within those data points.

The central thesis to this book was a promise to deliver a set of trade set-ups that were the best set-ups. Best was more or less defined as a trade where the reward outweighed the risk by at least 2:1, but more preferably 3:1 or 4:1, and the probability of the trade resulting in success was significantly greater than the probability of failure. To that end, the data analysis performed and detailed in Chapters 1 through 5 provided the framework to accomplish this grand goal. Having a good reward-to- ...