Market participants value consistency and abhor risk, generally speaking. And anytime something ‘new’ happens, there’s a new set of risks involved as the market is in a constant state of change. And market makers are often put in more of a defensive position when a new breakout happens as they now have to contend with pricing structure that wasn’t previously of concern.
If a trader is looking for a 1-to-2 risk to reward ratio on trends in which they’re expecting a 40% win rate, they might look for a 1-to-4 or a 1-to-5 risk-to-reward ratio on breakout setups that they’re looking for a winning percentage of 20%. But, regardless of how long one has been trading, winning feels good. And losing feels bad. The more we lose, the more that negativity can stack up into despair and, generally speaking as human beings, we feel pain more than we feel an equal amount of pleasure. So, for the breakout trader losing four out of every five trades, they’re going to have a negative emotional response about 80% of the time versus the 20% of the time when things work out.
Due to the lower expected win ratio that’s generally associated with breakouts and the more aggressive risk-reward ratios that traders will often incorporate to try to make up for that difference, one of the main keys of such a strategy is keeping losses as relatively minor. Because each additional pip or Dollar given up on the losers is just more whittling away of the minority of setups that may produce gains.