In a webinar hosted by SharkIndicators we’ve discussed trade management for the London Breakout Trade. We’ve covered the setup in previous posts and now return to look at how BlackBird can adjust the stop loss and profit targets. The setup itself is easy to understand and generally, it’s a good idea to work with setups and strategy concepts that you can explain. Being able to articulate why and where you get in and out of a trade, will limit the number of conditions for your system. That in turn helps in maintaining and overview of what works and what doesn’t.
Defining the Breakout Range
With the London Breakout Trade, we’re looking at the range the builds during the final hours of the Asian session, leading into the EU-Pre Session. This is a quiet 3 hour time window from 5:00 CET to 8:00 CET when the markets open in Europe. The setup was originally developed for FX markets and the idea is simply that a breakout from this range is likely to align with the initial move during the regular session.
Breakouts are validated by a Ichimoku composite trend definition (Kumo, Kijun-sen and Tenkan-Kijun cross). A stop order is then placed when price is about to break the Range High / Low levels and price action will trigger the trade once breached.
Defining when to submit stop orders is easy with the LizardRenkos because the bar grid is mapped by the Renko Tools. In the chart above we have a 3 tick trend bar vs. 6 tick reversal bar requirement. Accordingly, for the current bar we know what it will take for a new trending vs. reversal bar to plot. Specifically, by knowing the Ichimoku trend state, the prior bar close and the current bar projected high / low levels position relative to the Opening Range high/low, we have the following entry condition for the long scenario:
- If prior bar close is below the Opening Range high
- And the current renko projection high is at or above Opening Range high
- And the Ichimoku trend is bullish (green paintbar)
- Then, set stop order at Opening Range high +1 tick
Adjusting your Stop Loss
A lot of attention goes into defining when and under which conditions to enter a trade that it’s easy to forget that the profits are made on the exit. Another point which is often ignored is that certain strategies work well with one type of exit and falls apart with another. In the following, we’ll look at a couple of ways to define your exit conditions and show how the LizardRenko Projection Levels can help us with trade management too.
To start with, we’ll look at how to adjust the stop loss when certain price levels are hit, i.e. when to move to breakeven and show how to implement a trailing stop. If you’re familiar with NinjaTraders Advance Trade Management (ATM) templates, you will see the similarity. However, with BlackBird you‘re able to pinpoint specific indicator values, not limiting yourself to a fixed predefined ATR, point or tick value. For the London Breakout Trade, you‘ll want to define stop and profit targets based on the custom range and you’ll therefore want to work with tools can pull this information.
We also see that the trend weakens shortly after the first target it hit. Intuitively you’d use that information to adjust your trailing stop more aggressively. In the following we’ll look at how Bloodhound and BlackBird is able to detect and adjust to different trend states. This is about adding nuance to your systems, letting the trade management approach adjust to the current market scenario.
Dynamic Trade Management
Similar to what we did for the London Breakout Trade entry signal, we can create a signal that determines whether price is moving against our position between the 100% and 50% extension levels. If the Ichimoku show a neutral trend state, Bloodhound can then pass that information on the BlackBird which tightens the trailing stop. That way you‘ll be able to take away some profit on the 2nd lot too, instead of letting it slip all the way back to breakeven.
Likewise, the London Breakout Trade profit targets can be adjusted under certain conditions. Specifically, if we see a strong trend, profit targets can be moved out and while implementing a trailing stop reflecting that adjustment. Again, the pre-defined grid for the current renko bar is available to us and we can map the projected high / low levels before the price actually gets there. By knowing the Ichimoku trend state, the prior bar close and the current bar projected high / low levels position relative to the expansion levels, we can then define the following:
- If prior bar close is above the -100% extension
- And the current renko projection low isbelow the -100% extension
- And the Ichimoku trend is bearish (red paintbar)
- Then, move the firs profit target out from -100% to -200%
Conclusion
With the above examples you may test with multiple exit scenarios for the London Breakout Trade. However, while looking at different ways of managing the trades, keep in mind that it is part of an optimization process. Optimization will create a better backtest, but not necessarily a better strategy.