People often ask me if breakout strategies can be used for small accounts. And the simple answer is, yes, they can. Today, let’s take a closer look at this topic and how it can be done.
First, it is important to explain a crucial context. If you want to create breakout strategies for small accounts, you should work with low risk. But everything costs something. Low risk will almost always lead to some kind of compromise: in general, you will earn less and the stability of your capital will be less. But, you will experience longer periods where your account will go mostly sideways. Unfortunately, there are no black and white solutions in trading, and every advantage is redeemed by some disadvantage. Once you decide to create strategies for small accounts, you need to ask yourself: What is more important to you? Is it a small risk per operation or a minimal reduction possible? (And don’t say both, as they are contradictory. Why? I’ll explain with examples.)
reduction vs. risk per operation
There is a general rule in breakout strategies: the higher the stop-loss, the smaller the drawdowns. It may sound inconsistent, but the logic behind it is pretty clear: breakout strategies tend to take substantial corrections throughout the day, and a larger stop-loss will do much better. You risk less with a small stop loss, but you will lose more often. A larger stop loss will help you hold on during corrections. So while each loss will be a little more painful, the overall drawdown may be less and the win and success rate much higher.
Let’s take a look at one of my simple breakout systems that can be used to trade numerous markets, even with a small stop loss.
In this system, the smallest acceptable stop-loss value is 100 USD (Market EMD, 30 minute time frame). It is possible to use the same stop-loss in ES or TF markets with similar results. Such stop-loss is in fact very low for automated trading strategy, often even smaller than in similar markets during discretionary trading. With a stop-loss like this, it is possible to trade with a small account and losing trades will not be considerably unbearable.
What would equity and maximum reduction look like under this scenario? The system is generating stable profits, but equity has its weak periods. The average profit is $3,000 per year and the overall drawdown is $2,380. It means that it is possible to trade with a very small stop loss. However, the question is: Wouldn’t it be worth increasing the risk a little? I understand that for someone with a small account a stop loss above $100 might be unacceptable, but let’s see if we wouldn’t win more than if we used a very small stop loss of $100.
And now the same system with a stop loss of 300 USD. It seems like a big jump to increase the stop loss to 300% of the original amount, but let’s take a look at what we have gained. The average profit per year increased to approx. $4,200 (a 40% improvement), capital stability is considerably better, and the drawdown decreased to $1,930 (nearly a 20% improvement).
So the first rule of thumb when looking for ATS breakout strategies is: even if you’re working with a small account, look for a strategy with a slightly larger stop-loss than you would normally use in discretionary trading, or a bit larger. great that it would. feeling is acceptable.
In this case, you should perceive the stop-loss only as a necessary protection. Although individual losses will be more painful up to a certain point, your results will improve and the profit distribution will be more stable.
how to capitalize
Once we have a system with relatively little risk (300 USD is still a very small stop loss; I personally also work with 2000 USD stop loss per contract) and a small drawdown (less than 2000 USD drawdowns for a automated breakout strategy can be considered small), for such a strategy we can capitalize with a relatively small account. The technique is simple:
1) Perform a Monte Carlo analysis of the system (for example, in Market System Analyzer – http://www.MarketSystemAnalyzer.com) to find out the worst possible reduction in the future. This drawdown will mostly be 25% higher than your original capital, ie in the old system we would have to anticipate a drawdown of $2,400 instead of $1,930.
2) Think about what your maximum accepted layout is in percentage and capitalize it according to the Monte Carlo layout that should correspond to this percentage. If you decide that you can accept a 50% withdrawal into your account, then your capitalization will look like this: 2 x 2,400 USD = 4,800 USD. If you decide that you can accept a maximum withdrawal of one third of your account, then your capitalization will look like this: 3 x 2,400 USD = 7,200 USD.
With a little patience and research, you can come up with strategies that will be possible to trade under certain circumstances with very small accounts, ie 5,000-10,000 USD.
Once you have some strategies like this, it is possible to work with small portfolios (2-3 systems). In such a case, you should perform a Monte Carlo analysis on your portfolio as a whole (the MSA program is great for that) and compound according to the Monte Carlo drawdown of the portfolio.
How to look for strategies for small accounts
So, once again… The good news is that it is possible to find a good quality breakout strategy for small accounts. The bad news is that it will require a lot more patience and you will always have to give a little.
You need to ask yourself what amount you are willing to accept (this amount should be reasonable, for example $100 is a bit extreme, but $300-500 seems reasonable) and during the development of the breakout strategy you will need to implement this as a fixed amount from the beginning of the whole process, that is, in the search and development of the breakout strategy.
Generally speaking, it is best to find breakout strategies with a small stop loss on markets like YM and ES, especially on 15 and 30 minute time frames. However, much more patience is needed: finding a strategy for a small stop loss is considerably more difficult (but not impossible). In my experience, sometimes it pays to take a tried and tested strategy and test it on other markets with different stop-loss values. So I have found, for example, low stop-loss values for the BOSS system (but for timeframes greater than 15 minutes). In general, only one of about six of my breakout strategies can be used with a small stop loss. This only confirms the difficulty of pursuing this type of strategy, but with an account of around 8,000 – 10,000 USD, I can imagine having a portfolio with three such strategies and having a decent base for further growth.
Happy trading!