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 type of compromise: generally, you will earn less and your capital stability will be less. But, you will experience longer periods where your account will go mostly sideways. Unfortunately, in trading there are no black and white solutions, and every advantage is redeemed by some disadvantage. Once you decide to create small account strategies, you need to ask yourself: What is most 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 of thumb in breakout strategies: the higher the stop loss, the smaller the drawdowns. It may sound inconsistent, but the logic behind it is quite clear: breakout strategies tend to undergo substantial corrections throughout the day, and a larger stop-loss will fare much better. You risk less with a small stop loss, but you will lose more often. A larger stop loss will help you hold through corrections. So while each loss will be a little more painful, the overall drawdown may be less and the rate of win and success much higher.
Let’s take a look at one of my simple breakout systems that can be used to trade many markets, even with a small stop loss.
In this system, the smallest acceptable stop-loss value is $100 (Market EMD, 30-minute time frame). It is possible to use the same stop-loss in ES or TF markets with similar results. Such a stop-loss is in fact very low for the 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 drawdown look like with this scenario? The system is generating steady 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 bit? I understand that for someone with a small account a stop loss greater than $100 might be unacceptable, but let’s see if we won’t make 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 leap 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), principal stability is considerably better, and the drawdown has decreased to $1,930 (an almost 20% improvement).
Therefore, the first rule of thumb when looking for ATS breakout strategies is: even if you are working with a small account, look for a strategy with a slightly larger stop-loss than you would normally use in discretionary trading, or slightly larger. big i 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 point, your results will improve and the distribution of profits will be more stable.
how to capitalize
Once we have a system with relatively little risk ($300 is still a very small stop-loss; I personally also work with $2,000 stop-loss per contract) and small drawdown (less than $2,000 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 likely drawdown in the future. This drawdown will mostly be 25% more than your original principal, meaning 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 drawdown is in percentage and capitalize according to the Monte Carlo drawdown that should correspond to this percentage. If you decide you can accept a 50% withdrawal on your account, then your compounding will look like this: 2 x $2,400 = $4,800. If you decide that you can accept a maximum withdrawal of one third of your account, then your compounding will look like this: 3 x $2,400 = $7,200.
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 5000-10000 USD.
Once you have a few 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 capitalize according to the portfolio’s Monte Carlo drawdown.
How to find 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 should ask yourself what amount you are willing to accept (this amount should be reasonable, eg $100 is a bit extreme, but $300-500 seems reasonable) and during breakout strategy development 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 better 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. Thus I have found, for example, low stop-loss values for the BOSS system (but for timeframes greater than 15 minutes). In general, only one in about six of my breakout strategies can be used with a small stop loss. This only confirms the difficulty of looking for this type of strategy, but with an account of around 8000 – 10000 USD, I can imagine having a portfolio with three such strategies and having a decent base for further growth.
Happy trading!
