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 must work with low risk. But everything costs something. Low risk will almost always lead to some compromise: most of the time you will earn less and the stability of your capital will be less. However, you will experience longer periods where your account will be mainly diverted. Unfortunately, there are no black-and-white solutions in commerce, and every advantage is redeemed for a certain disadvantage. Once you decide to strategize for small accounts, you need to ask yourself: What is most important to you? Is it a small risk per operation or a reduction that is the smallest possible? (And do not say both, since they are contradictory. Why? I will explain it 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 might sound inconsistent, but the logic behind it is pretty clear: breakout strategies have a tendency to go through substantial corrections throughout a day and a larger stop loss will handle this much better. You risk less with a small stop loss, but you will lose more often. A bigger stop loss will help you stay inside during corrections. So while each loss will be a little more painful, the overall drawdown may be less and the rate of profit and success 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 (EMD market, 30 minute time frame). It is possible to use the same stop loss on the ES or TF markets with similar results. This 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 in 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 reduction 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 of more than $ 100 might be unacceptable, but let’s see if we would not actually earn 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 raise the stop loss to 300% of the original amount, but let’s take a look at what we have gained. Average annual profit increased to approx. $ 4,200 (an improvement of 40%), Equity stability is considerably better, and the drawdown was reduced to $ 1,930 (an improvement of almost 20%).
So 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 stop-loss a little larger than you would normally use in discretionary trading, or a little bigger than it would. feel is acceptable.
In this case, you should perceive the stop loss only as a necessary protection. Although individual losses will be more painful to some extent, your results will improve and your profit distribution will be more stable.
How to capitalize
Once we have a system with a relatively small risk (300 USD is still a very small stop loss; I personally also work with a stop loss of 2000 USD per contract) and a small drawdown (drawdowns of less than 2000 USD 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 reduction in the future. This reduction will be mostly 25% higher than your original capital, that is, in the previous system we would have to anticipate a reduction of $ 2,400 instead of $ 1,930.
2) Think about your maximum accepted reduction in percentage and capitalize according to the Monte Carlo reduction that should correspond to this percentage. If you decide that you can accept a 50% reduction in your account, then your capitalization will look like this: 2 x $ 2,400 = $ 4,800. If you decide that you can accept a maximum reduction of one third of your account, then your capitalization 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 in certain circumstances with very small accounts, that is, 5000-10000 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 capitalize according to the Monte Carlo reduction of the portfolio.
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 take a lot more patience and you will always have to give in a bit.
You have to ask yourself what amount you are willing to accept (such 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 have 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 in markets like YM and ES, especially in 15 and 30 minute time frames. However, it takes a lot more patience – finding a strategy for small losses is considerably more difficult (but not impossible). From my experience, it is sometimes worth taking a tried and tested strategy and testing it in other markets with different stop loss values. In this way I have found, for example, low stop-loss values for the BOSS system (but for periods of time greater than 15 minutes). In general, only one of about six of my breakout strategies can be used with a small stop loss. This just confirms the difficulty of looking for this type of strategy, but with a bankroll of around $ 8,000 – $ 10,000, I can imagine having a portfolio with three of those strategies and having a decent foundation for further growth.
Happy trading!