1-2-3 Breakout Trading System (part 2)
1-2-3 breakout system exits
In this post we’ll continue looking at the 1-2-3 breakout trading system by discussing an exit strategy for the long entries we covered last time, as well as looking at short entries and exits
1-2-3 breakout trading system - next steps
You will recall in my last post we looked at how to use technical analysis to identify long entries in an uptrending stock.
Let’s now look at an exit strategy you might adopt for this system.
My mentor, John Pontikas, always told me that exits were always far more important than entries. I confess that this didn’t really make sense to me when I first heard it - after all, I always thought “isn’t the trick to get the right entry in order to trade profitably?”
Well the answer is, no it’s not. As John taught me it is your exits that will make or break your trading, as it is only once you exit a trade that you will know whether that trade was profitable or not.
There is an old trading maxim that states; cut your losses short and let your profits run.
Let’s see how we might let our profits run with the 1-2-3 breakout trading system.
In this example, we are going to use trailing stops to follow the 1-2-3 price waves while the stock continues trending.
As I mentioned in my last post, the initial stop is placed just below the last trough prior to our entry.
As the stock/market continues to form waves, we implement a trailing stop just below every new trough formed, until eventually we get stopped out of the trade.
This is one simple way to attempt to maximise a trend, and you can see how it works on the chart below.
In the above chart you can also see how you might add to your existing positions as new entries form.
The 1-2-3 Breakout system can also be used in down trending markets as well, as the following two charts demonstrate.
1-2-3 Breakout System - short entry example
1-2-3 Breakout System - short exit example
When looking at this exit strategy the first reaction you are likely to have is; “hmmmm, look at what I could have made if I didn’t wait for it to drop and stop me out…”.
This is usually followed by; “now what can I do to maximise the run so I don’t leave that extra profit behind…”
I’d suggest these thoughts are quite natural, but it is your greed talking. There are many ways you might implement different stops and it will come down to your own trading psychology as to which you might use.
If you trail your stops too quickly and tight to the price action, then you will get maximise short runs before they retrace too much, but will miss out on the longer runs.
The question you need to ask yourself is; do you want to win the sprints or the marathon?
In any case, you have some information now that you can use to backtest and see for yourself whether the 1-2-3 breakout system will let you trade profitably on your favourite stocks or markets.
A word of warning. Do not be tempted to try live trading any system (including this one) without first conducting your backtesting and paper trading, and incorporating a money management strategy to protect your capital as part of a trading plan.
Happy Trading
Brian Dibbins
Elite Insiders Group - Trading Systems
Trade Profitably © 2006 - 2007
