Let’s say you buy at the breakout of the highs at $8,400 and place your stop loss at $6,000 level.
That’s a stop loss of $2,400.
If you buy when the volatility of the market is huge, a logical stop loss will minimally be about $2,400.
Whereas the one with a buildup, the stop loss is just about $500.
What's the implication of this?
So when you trade breakouts with a buildup, your R multiple is more favourable to you.
Because if you think about this, for every $500 the price moves in your favour, that's a profit of 1R.
In other words, a 1 to 1 risk to reward ratio.
If the market moves $5,000 in your favour, that's a risk-reward ratio of 1 to 10.
On the other hand, when you buy after volatility has expanded and your stop loss is $2,400…
A $5,000 move by the market is only a risk to reward ratio of slightly more than 1:2.
So if your stop loss is huge, you’ll need the market to move in your favour more, before you earn a 1 to 1 risk to reward ratio.
This is the difference between trading with a buildup and just blindly chasing the markets.
So trading with buildup:
- Improves your winning rate
- Improves your R multiple on your trade
Let me share with you another example.