The breakout is the most visible part of a trend following system and therefore the most misunderstood. It is the moment a price moves beyond a defined high or low, triggering an entry signal. It is concrete, observable, and easy to talk about. Because of this, a certain type of trader latches onto breakouts as though they were the strategy itself. They are not. They are one component of a system that requires many other components to function, and obsessing over entry while neglecting everything else is one of the most reliable ways to lose money in markets.
Carl Sagan put the underlying problem precisely: “It is far better to grasp the Universe as it really is than to persist in delusion, however satisfying and reassuring.” The delusion in this context is that finding the right entry signal is the hard part. It is not.
The Entry Obsession and Why It Fails
If you believe trend following is simply buying or selling a 20-day breakout, you are wrong. If you treat breakouts as a Holy Grail, you have missed the point and are likely already on your way to losing your capital. A trader who focuses on market entry only is in serious trouble. Good trading is mostly money management and risk management. Once you have the money management in place, trading becomes entirely a matter of personal discipline and psychology.
Gibbons Burke identified the root of this problem when he observed how trading tools are marketed and consumed:
“There are many, many financial sites on the Web that let you track a portfolio of stocks on a glorified watch list. You enter in your open positions and you get a snapshot, or better yet a live, real-time update, of the status of your stocks based on the site’s most recently available prices. Some sites, like Fidelity’s, provide tools that tell you how your portfolio is allocated among various asset classes such as stocks, mutual funds, bonds and cash. While such sites get at the idea of money or portfolio management, the overwhelming majority fail to provide the tools required to answer the central question of money management: When I make a trade, how much do I trade? (Try and find the topic of money management on the Motley Fool site.)”
Gibbons Burke
The central question Burke identifies, how much to trade, is not answered by any breakout indicator. It is answered by a position sizing methodology that accounts for volatility, portfolio heat, and the rules governing how much capital is at risk at any given time. Free charting tools do not provide this. Most paid tools do not either. The industry has built an enormous infrastructure around entry signals while largely ignoring the part of the system that actually determines whether a trader survives.
What a Complete Trend Following System Actually Addresses
After six years of fielding questions from traders who believe a trend following system is simply another indicator, this site has developed a clear picture of what most people are missing. A complete system must address all of the following:
- How to exit the market.
- How much to buy or sell at any given time for any market position.
- How to adjust the portfolio during a winning streak.
- How to adjust the portfolio during a losing streak.
- How to use risk management to ensure you do not blow out.
- How to take a loss to avoid larger losses.
- How to trade both long and short positions.
- How to balance long and short positions.
- How to handle accumulated new profits.
- How to handle stops.
- How to adjust stops.
- How to account for volatility.
- How to prepare for unforeseen large-scale trends.
- How to handle or not handle profit targets.
- How to view risk of ruin.
- How to handle entry and exit filters.
- How to handle psychological and discipline adjustments.
- How to use money management.
- How to handle bet size for each trade.
- How to determine the exact amount for each trade.
Notice that entry appears once on this list, buried among nineteen other issues. Exit, position sizing, stop management, volatility adjustment, portfolio balance across long and short positions, the handling of profits and losses, risk of ruin, psychology: these are the substance of the system. A trader who has solved entry and nothing else has solved the least important problem.
Why Free Tools Cannot Teach This
Yahoo Finance and MarketWatch offer free technical studies that can be applied to any chart in seconds. They are useful for looking at price history. They are not useful for building a trading system, because they answer the wrong question. They tell you where price has been and where certain indicators are pointing. They do not tell you how much to risk, when to add to a position, when to cut it, or how to manage the portfolio as a whole across correlated and uncorrelated markets simultaneously.
If you try to use these services and their abundance of indicators as a trading system, you will lose money. The indicators are not the problem in isolation. The problem is that they create the impression that entry is the core decision, when in reality entry is one of the easier problems a systematic trader faces. The hard problems are all about what happens after entry: sizing, management, and the discipline to follow the system through drawdowns that would cause most people to abandon it.
Breakouts in Context
None of this means breakouts are irrelevant. A price breaking to a new high or low over a defined lookback period is a meaningful signal. It suggests that the balance of supply and demand has shifted, that the market is doing something it has not done recently, and that a trend may be emerging. The original Turtle trading system used breakout entries as its trigger. The Donchian channel, a tool built around breakouts, remains one of the foundational concepts in systematic trading.
But the Turtle system did not succeed because of its entry rules. It succeeded because of the complete architecture surrounding those entries: the position sizing based on volatility, the pyramiding rules, the stop management, the portfolio diversification, and the discipline required to execute consistently. Strip out everything except the entry signal and you have a coin flip. Keep the full system and you have an approach with a genuine edge.
The myths about trend following almost always center on entry. The reality of trend following is almost entirely about everything else.
Frequently Asked Questions
What is a breakout in trading?
A breakout occurs when a market’s price moves beyond a defined level, typically a recent high or low over a specified number of periods. A 20-day breakout, for example, means price has exceeded its highest or lowest point over the past 20 trading days. In trend following systems, breakouts are used as entry triggers on the assumption that a sustained move in the breakout direction may follow.
Why is entry less important than position sizing in trend following?
Because position sizing determines how much of your capital is at risk on any single trade and across the portfolio as a whole. A correct entry with poor position sizing can still result in a blown account. A slightly imperfect entry with correct position sizing and disciplined stop management can still be profitable over a large sample of trades. The edge in trend following comes from the complete system, not from the precision of any individual entry.
What is the role of stops in a trend following system?
Stops serve two functions: they define the maximum loss on any single trade, which feeds directly into position sizing calculations, and they provide the exit signal when a trend reverses sufficiently. A trend following system without stops has no mechanism for cutting losses, which means individual losing trades can grow without limit. The placement and adjustment of stops is one of the most important design decisions in building a systematic approach.
Can free charting tools be used to build a trend following system?
Free charting tools can display price data and basic indicators, but they do not address position sizing, portfolio-level risk management, stop adjustment, or the behavioral discipline required to execute a system consistently. They answer the entry question while leaving every other question unanswered. A trader relying solely on these tools is missing most of what matters.
Trend Following Systems
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