The Powerful Benefits of Breakout Trading Systems

Looking to elevate your trading with strategies that have stood the test of time? 

In this article, we’ll dive deep into breakout trading strategies and explore the key benefits they can bring to your trading approach. From reducing risk to adapting to different market conditions, breakout strategies are momentum-based, meaning we’re buying into strength.

Let's get started!

Understanding Breakout Strategies

Breakout strategies are momentum strategies, which means we're buying into strength as the market moves upward. By capitalizing on significant price movements, these strategies aim to enter trades at the onset of a trend.

Examples of Breakout Strategies

• New 52-Week High: Buying a stock when it makes a new 52-week high is a common approach.
• New 10-Day High: Purchasing when a stock hits a new 10-day high can signal emerging momentum.
• Price Crossing Above a Moving Average: Buying when the price crosses above a moving average indicates a potential upward trend.

The Five Key Benefits of Breakout Trading Strategies

Now that we understand what breakout strategies are, let's explore the key benefits they offer to enhance your trading performance:

1. Reduced Market Exposure

Breakout strategies are ideal for day trading, allowing you to enter and exit positions within the same day. This approach minimizes the risk of overnight gaps and unexpected news events that can cause significant price swings when the market is closed. By focusing on intraday movements, you limit your exposure to unpredictable events, making it a safer strategy for many traders.

2. Adaptability

Another significant advantage is their adaptability. Breakout strategies can be adjusted to suit current market conditions, and many have built-in parameters that automatically adapt to market volatility. This flexibility makes them robust across different market environments, which is essential for consistent performance.

3. A Proven Track Record

Breakout strategies have been around for decades—and for good reason: they work. Tested and refined in countless market conditions, they boast a proven track record of success. Building on this solid foundation gives you confidence, knowing you're not starting from scratch but leveraging strategies that have stood the test of time.

4. Scalability

These strategies aren't limited to just one market. They can be applied across multiple markets—stocks, futures, forex, or even cryptocurrency—and various timeframes. This versatility allows you to diversify your portfolio, spread risk, and capture opportunities in different asset classes. The fact that breakout strategies work across different markets and timeframes underscores their effectiveness—they simply work.

5. Ideal for Beginners

Finally, breakout strategies are excellent for beginners. If you're a new trader—not yet making money consistently—why reinvent the wheel? Breakout trading is a smart choice, providing a straightforward and effective approach. I always recommend that both new and seasoned traders consider incorporating breakout strategies into their trading arsenal.

Implementing Breakout Strategies with EasyLanguage

Now that we've explored the benefits, let's look at how to implement a breakout strategy using TradeStation and EasyLanguage.

20-Day Price Channel on NASDAQ Futures Chart

In TradeStation, we're examining the daily chart of the NASDAQ futures. I've applied a simple indicator—a 20-day price channel:

• The green line represents the 20-day highest high.

• The red line represents the 20-day lowest low.

We're looking for a breakout when the price closes above this 20-day high. When this happens, we initiate a long position, aiming to catch a momentum trade and capture some profit. The red line signifies our exit—we hold the position until the price closes below the 20-day low.

Writing the EasyLanguage Code

Here's how to implement this strategy in EasyLanguage:

Inputs:
breakout(20);
Variables:
hiBreakout(0),
loBreakout(0);

hiBreakout = Highest(High, breakout)[1];
loBreakout = Lowest(Low, breakout)[1];

If Close > hiBreakout Then
   Buy Next Bar at Market;
If Close < loBreakout Then
   Sell Next Bar at Market;

Breaking Down the Code:

Inputs: We define the breakout range (breakout) as 20 days.

Variables: We calculate the highest high (hiBreakout) and the lowest low (loBreakout) over the breakout range.

• hiBreakout = Highest(High, breakout)[1]; tells TradeStation to look at the highest high starting from the previous bar ([1]) over the past 20 days.
• loBreakout = Lowest(Low, breakout)[1]; does the same for the lowest low.

Trading Logic:

• Buy Signal: We buy when the closing price is greater than the high breakout.
• Sell Signal: We sell when the closing price is less than the low breakout.

Applying the Strategy

When we apply this strategy to our chart:

• Entry Point: The strategy buys when the price breaks above the upper channel (green line).
• Exit Point: It sells when the price closes below the lower channel (red line).
• This simple approach effectively captures trending markets.

Evaluating Performance

The performance report reveals:

• An equity curve trending upward.
• A profit of $192,000 over 58 trades.
• An average profit of over $3,300 per trade.
• A maximum intraday drawdown of about $83,000.

We don't have a lot of trades for this strategy, which could be a problem. However, the concept looks good as we have a rising equity curve. Of course, the NASDAQ market has a long side bias so building long trading systems is really easy to do. 

Let's try a different timeframe to generate more trades.

Testing Different Timeframes

You don't have to limit yourself to daily charts. Let's switch to a 120-minute chart, where each bar represents two hours of trading.

Applying the same strategy:

• Increased Trades: Shorter timeframes result in more trading opportunities.
• Consistent Results: The strategy continues to capture significant trends.
• Equity Curve: Shows consistent growth, even though individual trades might yield smaller profits.

Looking at the equity curve, it's far from perfect, but we have an upwards rising equity curve that is clearly making money. Keep in mind we don't have any filters, stops or exits on this strategy. It's just the starting point of a breakout strategy. Furthermore, it's is non-optimized and it's really easy to build.

Enhancing the Strategy

What would I do to improve the strategy? Well, I've talked about that in other articles but in short, I would test different filters. Maybe a regime filter so the strategy is only taking  long trades in a strong bull market. I might try an ADX for filtering on volatility. I would also, of course, put in stops, and test profit targets.

The point of this article isn't to show you a complete system, but is to show you that just a few lines of easy language code can produce a breakout strategy that looks really good without profits, targets, without stop losses, or without adding any other filters. The skeleton of this strategy is solid—that's the true power of breakout strategies.

• Adding Profit Targets: Set specific profit goals for your trades.
• Implementing Regime Filters: Use filters to only take trades in favorable market conditions, such as a strong bull market.
• Applying Volatility Filters: Incorporate indicators like ADX to filter based on market volatility.
• Setting Stop Losses: Always recommended to manage risk effectively.

Common Rookie Mistakes to Avoid

While breakout strategies offer many advantages, it's important to steer clear of common pitfalls:

Mistake #1: Reinventing the Wheel

Many traders attempt to create exotic trading systems from scratch. If you're not consistently making money yet, stick to what works. Simplify your approach. Breakout systems are easy to understand, easy to code, and are proven models used by many successful traders.

Mistake #2: Overcomplicating Your Strategy

The strength of a breakout strategy lies in its simplicity and clarity. Simple strategies are often more adaptable and continue to work well into the future. Stick to straightforward rules and avoid overcomplicating your strategy. By doing so, you'll enhance adaptability and long-term effectiveness.

By avoiding these common mistakes, you'll be well on your way to trading success.

Key Takeaways

• Breakout Strategies Are Momentum-Based: They capitalize on upward market movements by buying into strength.
• Reduced Risk: Day trading with breakout strategies minimizes exposure to overnight market risks.
• Adaptable and Scalable: These strategies can be tailored to different market conditions and applied across various markets and timeframes.
• Proven Effectiveness: Decades of use have shown that breakout strategies consistently work.
• Ideal for All Levels: Suitable for both beginners and seasoned traders looking for a robust trading approach.

Final Thoughts

Today we've explored the powerful benefits of breakout trading strategies—from reducing risk to offering scalability across markets. Breakout systems work, and I highly recommend considering them before exploring more complex trading methods.

Here are some related articles to breakout trading

• Opening Range Breakout Trading Strategy Design and Implementation
• The Anatomy Of A Breakout Automated Trading Strategy: Markets, Timeframes, Exits, Strategies
• The Anatomy Of A Breakout Automated Trading Strategy: The Components
• The Anatomy Of A Breakout Automated Trading Strategy: The Concept

That's all for now.