We will make trading choices based on the potential price movements concerning the trendlines.
Price may act in three distinct ways; I’ll now describe each case and show it using graphs:
- Bounce
- Breakout
- Pullback
Bounces
When a price reaches a key level of support or resistance and then quickly reverses course, this is known as a “bounce.” We will be using these signals often in our trading.
In the following pages, we will see several examples of bounces in action:
Several price fluctuations occurred at these key support and resistance levels. The higher the number of bounces, the more powerful these levels are. Therefore, only levels with at least two bounces will be used for trading. Trading signals based on levels with just one bounce should be more reliable to use in the market.
Breakouts
As the price moves beyond a previously established support or resistance level, we call it a breakout. Large volumes and rapid price changes are often associated with these events. None of these indications will be used in any trading by us.
The following are some ideas for breakouts:
Many beginner traders wrongly believe that a Breakout signal would result in a winning transaction.
If a breakout occurs, it is typically an untrustworthy indication. ‘Fakeout’ occurs when the price seems to break through a resistance level but closes below it.
This often occurs in the context of trading on short periods (Day Trading).
You can trade breakouts, but you’ll have the same problem most traders do when using these signals: heightened volatility.
The inability to set a stop-loss at a suitable place is a significant disadvantage. A stop loss is difficult to determine when entering a breakout since the price may retrace, hit our stop-loss order (ending our trade), and then continue in the original direction. Because a stop-loss order cannot be too close to the current price, our potential gain is reduced.
Next, we’ll go through the details of the primary signal we’ll be trading.
Pullbacks
When the price moves back to test a Support level or Resistance from which it has broken out, this is known as a pullback.
We’ll be trading this high-quality signal in a variety of chart patterns.
The following are some examples of pullbacks:
You can expect a pullback of a few bars following the breakout. We will rule out this trading opportunity if the correction doesn’t happen soon. This is because, with time, people’s psychological assessments become less accurate. It would be best if you always traded with the most recent trend lines and ignored the older ones.
The pullback is a very reliable trading indicator that generates several profitable transactions. This is supported by the fact that we are trading with the dominant trend when we take advantage of pullbacks. Furthermore, due to the correction, a breakout occurred, validating the trend’s strength and improving the quality of our signal.
When Trade is Confirmed
The precise timing of trading is a topic we will now discuss. Up to this point, we have spoken about the potential trading possibilities (bounces and pullbacks). It is time to detail the precise moments at which each result is verified, and a transaction should be placed. If you still need to understand the principles, don’t worry: many real-world instances of these methods are provided in the following paragraphs.
Bounce
Validation of bounce occurs when…
- One candle was formed with the price moving in the opposite direction of the previous candle.
- The previous candle’s low (for short trades) or high (for long trades) was broken by the next candle (for long trades).
Examples:
Pullback
It’s the same way a bounce is validated, so we know the retreat is real.
The precise entry point is shown in the last chart pattern examples.
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