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Hi folks
How does the traders equation apply to a breakout from a trading range like today?
Since 80% of all breakouts fails in a range then any trade out of the range must be a low probability trade and therefor you should aim at 2 times your initial risk. But that is not likely, you can only expect a measured move equal to the height of the range and that will only pay off one times your risk. Unless you use a skunk stop of course.
So what am i missing ?
If you sold yesterday 65 or 66, the initial stop is above 61 last major high because despite you are low in a TR, you are betting on the bear trend premise, not the TR premise (TR bulls created 64 but they were not able to trigger it). Also, the Trader's equation works with the Actual Risk (AR), not the Initial Risk, so once the trade goes your way you can reduce the profit target accordingly.
If you sold either 65 or 66 you have to exit above 67, and again sell below 68... Easy said after the fact but very difficult to do in real-time. Instead, learn to take 49 or 50 and hold, and you will be in much better position to make money!
I agree with Ludopuig. The only thing I would add is that it was BO mode Contracting triangle on bar 48. BO mode means 50% chance of a BO up and 50% chance of a BO down. Then 50% chance the BO fails. This is the reason, if you are short, your premise is a bear trend and not a TR with the days range at that point. bar 49 broke out of the triangle and 50 confirmed it. Short below 49, higher probability to short below 50. 61 was a low 3or4 wedge bear flag so the 65 BO probably had a much lower probability of failure than 80% (maybe 50%). A good target down was a MM based on the height of the triangle (3893.75) which is 2 times the distance to your stop above 61 if you sold below 65. Therefore even if your probability of a successful BO is only 50%, this trade has a positive TE.
Thank you guys
That clarify things