Throughout our many years of trading, we have faced numerous major market movements. Traders who have steadfastly followed the trend during these unilateral big movements have earned a fortune, while those who always miss the big moves or exit too early and then fail to seize the opportunity again are left to regret alone. The latter is a true reflection of what many traders face when confronted with a market breakthrough: hesitant before the breakout, hesitant during the breakout, and still hesitant after the breakout, ultimately ending up with nothing. A psychological barrier always obstructs their path to victory. This article will discuss this very common trading mindset.
Why do traders often miss market breakouts?
Investment guru Jesse Livermore once said: "There is nothing new on Wall Street. Whatever happens in the market has happened before and will happen again." Indeed, market trends are regular. After a market trend persists for a long time, it will enter a critical state and then experience a major breakthrough. However, only a few traders can truly catch the "breakout" express in time. Most traders are always missing out.
Think back, we often encounter such scenarios: When the market approaches a peak or a trough, we are eager to enter but dare not; when the market breaks for the first time, we enter hastily only to face a false breakout or a pullback, exiting quickly with frustration and disappointment; and when the market experiences the second, third, or even nth breakout, we become more cautious, with the shadow of false breakouts and pullbacks haunting us. Eventually, we can only watch helplessly as the market soars, as a beautiful dream shatters in an instant.
In addition to the negative impact of false breakouts, another factor that causes us immense psychological pressure is the market's violent movement once it breaks through a key level, especially on a large time frame, sweeping through resistance in just 15 minutes or even 5 minutes. The swift and decisive nature of these breakouts can also instill fear in us. Traders who prefer to monitor short time frames become more prone to anxiety and fear. If these psychological barriers are not broken, traders will become increasingly hesitant to "get on" after missing the first opportunity to enter.
How to "No Longer Hesitate Facing a Breakout"?
So, how can traders overcome this significant challenge? Unquestionably, establishing a trading system is the most basic and crucial step. Having a comprehensive and stable trading system significantly reduces trading uncertainties and improves success rates. Under the guidance of a system framework, traders can remain more composed and calm. However, the difficulty lies in the time it takes to develop such a system. To tackle the mindset of "hesitation at the breakout," we can start by addressing the following aspects:
1. Two Tricks to Identify False Breakouts
As mentioned above, false breakouts can cast a psychological shadow on traders. If we can correctly identify and fully utilize false breakouts, this phobia can be significantly alleviated. First, we must deeply understand the implications behind false breakouts. False breakouts are usually the result of large players like hedge funds deliberately flooding the market to create a fake impression, enticing retail traders to follow and enter the market, then quickly withdrawing or trading in the opposite direction, causing many retail traders to be stopped out and even go bankrupt.
One effective method to identify false breakouts is to observe daily closing prices. If the daily closing price continuously breaks above resistance or falls below support for three days or more, and the indicators after closing also suggest a successful breakout, then the likelihood of a successful market breakout is higher. If the daily closing price does not stay above the key levels, then the breakout you see during the day might very well be a false breakout.
Another effective method is to conduct historical backtesting. Each market or trading instrument has its own patterns, and the method of observing daily closing prices can have its flaws. To improve identification accuracy, we can perform blind tests on a trading instrument. Blind testing involves pulling up a large volume of historical candlestick charts, selecting a portion of them, covering the subsequent market movements of that portion, and then moving step by step to the right, deciding whether to buy based on one's strategy or system signals. By this means, we can document the patterns of false breakouts and the historical success rate of breakouts for a certain instrument. Of course, we can also choose to use computer programs for backtesting.
2. Strict Adherence to a Risk Management Plan
The importance of risk control and capital management cannot be overstated, even if mentioned a thousand times. This is part of building a system and deserves to be emphasized again. Beyond standard methods like fixed-amount stop-losses, we can also focus on studying the movement patterns of a specific trading instrument and adjust stop-loss levels accordingly. With risk control measures in place, even if we encounter a false breakout, our losses won't be too severe. Only by strictly following our own capital management plan can we remain not greedy, not hesitant, and not fearful.
3. Daring to Admit Mistakes, Eliminating Personal Biases
Hedge fund mogul Bruce Kovner once said: You have to be willing to make mistakes occasionally; there's nothing wrong with making mistakes. You try to make the best judgment; if you're wrong, you continue to make the best judgment; if wrong again, you still continue to make the best judgment, which might double your money this time.
His words make sense, after all, no one is perfect. From a human perspective, traders do not like to make mistakes or admit them. Some traders disregard trend patterns and market rules, harboring biases against the market. This self-fear and fear of mistakes cause repeated trading failures and significant losses in their accounts. However, if they can calmly deal with every failed breakout and learn from their experiences, they might not end up in a devastating loss.
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