Oct 22, 20217 min
Breakout Strategy turned 9k into 82 Million!
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In this video we review the trading strategy and concepts from the Swedish swing trader Kristjan Kullamagi.
Kristjan is a self-funded independent trader who has amassed tens of millions through his breakout strategy.
To measure the magnitude of Kristjan’s success we found that his trading account in 2013 stood at $9100. By 2018 this grew to 1.4 million, and in July 2019 it grew further to 4 million dollars.
As of March 2021, Kristjan’s account stood at 82 million, an astonishing achievement by anyone’s standard.
Today we look at his specific setup criteria and concept.
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Like most of us, Kristjan’s path was far from plain sailing. He started in 2011 as a day trader, and managed to blow up his trading accounts on four occasions during the first two years.
He later moved away from the lower time frames and viewed the action from further out to become a swing trader.
Kristjan said:
“I started moving away from day trading to swing trading since I realized the potential is so much bigger there”
Before we look at the strategy which has netted Kristjan a fortune, let’s first determine what he says about position sizing and risk.
Kristjan says you should never have more than 30% of a position held overnight, suggesting that his position sizes fall between 10 and 20% of account size, and his risk per position ranges from 0.25 to 1%.
Therefore, if we assume an account size of $100,000, the position size would be between 10 and 20 thousand dollars, and the risk per position would be between 250 and 1000 dollars.
Kristjan does however point out that when his account was less than a few million dollars, he used a slightly higher risk of between 0.5 and 1.5% risk per position, a risk percentage I tend to use myself.
Alluding to his failures in the early years, Kristjan said:
“At the very beginning I risked more still, but honestly I had not a great grasp of the concept risk and position sizing”.
Now let’s look at the set-up he uses.
The breakout trade is Kristjan’s preferred strategy, and he lays the foundation for his approach by saying:
“If you study thousands of the biggest winning stocks over the past 100 years they tend to move in stair steps, meaning they will make a 20-50%+ move, pull back and go sideways for a while, then make another move.”
Kristjan uses the daily chart, initially looking for a big move within the last 12 weeks, ideally moving between 30 and 100%.
The next step is to look for an orderly pull back into a consolidation, the consolidation can run between 2 and 8 weeks.
During the consolidation the price surfs a rising 10 and 20 day moving average, with the 50 day moving average not too far behind.
Kristjan’s advice is to enter the long trade as the stock starts to break out of its consolidation.
He uses the low of the day as the stop loss position, also considering the range of price movement to ensure the risk reward metrics remain sensible. For example, if the Average True Range of a stock is 5% then the stop loss should never be greater than 5%.
In terms of managing the trade thereafter, Kristjan suggests selling between one third and one half of the stock between 3 and 5 days after entry, and then move the stop to breakeven.
The remainder of the position should then have a trailing stop governed by the 10 or 20 day moving average, depending on how fast the stock moves.
The trade would be closed if the price closed under the moving average.
That is the concept behind Kristjan’s approach, but before we move on to some of his real chart examples, I would like to take the opportunity to say a huge thank you to those that have subscribed to the channel. Today we reached the 50,000 subscriber milestone, thank you to everyone for their support.
Kristjan says:
“I am a swing trader and use the daily chart to find these setups, but these setups also work on the weekly chart and the intraday charts”
I tend to agree with his statement, I use a very similar concept in our group using the weekly chart.
Ultimately, the fundamental concept regardless of time frame, is to achieve minimal risk with maximum reward. A concept which is so important.
Let’s look at Kristjan’s concept in practice.
We are provided with the daily chart of Axon Enterprise.
By using his check list, we look for the initial price increase of between 30 and 100%.
In this instance price increased closer to the 100% mark.
Next is the orderly pull back of consolidation, which we see here.
The consolidation falls within the two to eight week duration, with this example lasting around three weeks.
Next, we need to see support from the moving averages, and again here we can see price being respectful of the yellow 20 day moving average throughout, not forgetting the trailing support of the 50-day moving average.
Next we seek the breakout.
Once again, in this example we can see the breakout, but instead of waiting for the candle to complete, which is my preference, Kristjan suggests entering the trade as it breaks out of the consolidation period.
The stop placement is underneath the low of that day at that moment.
Once we have all set up criteria checked, we move on to the management of the trade.
Remember Kristjan says he likes to sell either a half or a third of his initial position, 3 to 5 days into the trade, and then move the stop to break even.
The balance of the trade is then sold when the daily candle closes under the moving average line. In this example we saw the yellow 20 day moving average as having the most merit, we therefore sell the position here, at the close of the offending candle.
What I like most about these types of trades, is the risk reward element we mentioned.
The rationale provides the logic for low risk and the potential for high multiples of reward.
Kristjan says:
“It’s all about finding tight, high probability areas to enter so you can have high risk/reward on your trades”
Kristjan says he uses numerous popular trading setups including his other favourite, the flag breakout.
Named a flag because of its shape, and just as before, its based on the same principle, a prolonged increase in price followed by a consolidation period.
Kristjan then looks for the breakout, enters soon after the break and places a stop accordingly.
Summarising the technical set ups Kristjan looks for, he simply says:
“It’s pretty much flat channels, symmetrical and descending triangles.”
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Kristjan provides an example of a flag trade he took in May 2020, against the popular stock Tesla.
As with many chart patterns there are elements of subjectivity, but we can see here how we get the rise in price which is soon followed by the consolidation, this forms the flag or arguably an ascending triangle.
Kristjan would have entered somewhere here at the break, and soon after watched the price rise considerably whilst respecting the 20 day moving average along the way. Again the concept remains, minimal risk and maximum reward.
Kristjan says:
“It’s all about making 5-20+ times your initial risk. You can be wildly profitable with having just a 25-30% win rate, it’s all about having small losses and big winners.”
Although we don’t know Kristjan’s exact exit point on this trade, we can comfortably say that he achieved at least a 20 to 1 risk reward ratio based on the moving averages, a very good trade indeed.
It’s fair to say Kristjan’s primary focus is on money management and the concept of risk and reward, the set ups themselves are secondary and not ground-breaking, in fact Kristjan Says:
“A lot of great traders trade the same setups because they work and have done for 100 years”
Fundamentally trading is a numbers game, a game of odds, and the more we can move the odds in our favour the more margin of error we can absorb, this is where risk reward becomes the major factor.
Let’s look at how risk reward and the margin of error have an important correlation.
Kristjan suggests his win rate is 30% meaning 7 of his trades will be losers and 3 will be winners, often coming in clusters.
From what we know already let’s assume Kristjan’s loss for each of his losing trades is 1% of equity and the gains for his winning trades are 10% of equity. We can calculate that he lost 7% but gained 30%, equating to a 23% profit overall.
Such an approach provides considerable margin for error, for example, let’s assume Kristjan’s batch of trades only had a win rate of 10%, meaning he had 9 losing trades and 1 winning trade. We now have losses equating to 9% and a winning trade equalling 10%, providing an overall profit of 1%. Therefore even underperformance can be profitable, the key is keeping losses small and allowing the winning trades to run.
Now let’s look at a strategy which also relies on the same 30% win rate but has a lower risk reward, for example we risk the same 1% on the losing trades but target 4% on the winning trades. This would provide a 5% profit overall. The problem however with a lower reward, is that the margin for error is far less.
Just like we did previously, if we hit a longer losing streak, again providing a 10% win rate, the strategy loses its margin for error and returns a loss. The message here is not just about the overall return, but how an improved risk reward ratio allows for the accommodation of more losing trades. Kristjan says:
“My trading journal at times is mostly a sea of red and then there is a big winner here and there. This is what trading is all about, you can be wrong 8/10 times and still make money.”
Overall I like Kristjan’s approach, and much of it resonates with my philosophy, it’s all about risk reward and using a particular chart pattern to provide rationale for improved probability.
Thanks for watching, and as always if you found value please hit the like button and consider subscribing.