The third point of the trading plan: how to determine market entry points. Trading a breakdown or break out.
As you can see from the previous series, we are a bit against tambourines, reading coffee grounds and cryptocurrency casino. Today we will tell about the method, how to determine the entry points, and market exit points, in order to use it statistically, without believing in a miracle.
The method is based on the properties of support and resistance levels and therefore works on any timeframes.
To determine market entry points, use one of these two methods:
- Trade using breakdown. Search for entry points on the impulse wave, when the market starts to move actively, and we join this movement. This is called a breakdown level trade.
- Trade using a breakout. The search for entry points at the moment when the impulse wave is completed, and the correctional wave following it has also almost ended.
Trading using breakdown is the principle of finding the market entry point, it was used as early as the 20s of the previous century, and is still used today.
Breakdown trading is based on entering the market at the time of the start of a strong move:
Let’s suppose that you have built a resistance level on a daily timeframe. When the market closes above it, a buy signal is formed.
If the support level is pierced, a sell signal is formed.
These conditions are a must:
1. The level must be pierced by the body of a closed candlestick. This means that we need to wait for this situation on the market:
The previous candlestick was closed inside the resistance level: there was no breakdown of this level. The market went above the line, but here is no result: the candlestick was closed inside, without fulfilling the conditions we needed. The next candlestick opened above the resistance level. It is not yet closed, but it is being formed. This means that we cannot see the fact of the breakdown of the resistance level. The market must necessarily close above this level.
This logic is entirely based on the first property of the support and resistance lines. If the paragraph above was hard for you, read one of our past articles, “Support and resistance levels: how to build it and how to identify the market direction with it”.
Just a few words about which candlestick may be considered as closed:
Let’s suppose that the market moves near the resistance level. News release, and on this fact the market starts to become stronger.The candlestick is formed, as in the picture above. Newbies sin want to predict if this level can be broken. This is a normal desire. But to follow it, opening a position according to hypotheses, is not OK.
The breakdown is considered as a breakdown if the market closes above the level. No one can know about it in advance.
It often happens when the market is higher at the time of the candlestick forming, and the candlestick looks as if the market moves in a “clear” direction. But very often after this the market returns to the resistance level and does not close higher. Then it bats off at all, and the price slides down. This happens quite often. If you follow your emotions, do not follow the trading plan, and find a forming candlestick, as in the picture above, open a buy position, you can get into a situation where you will see something like this after the market closes:
You will see that the market has not pierced this level. Such situations are common.
That is why it is important to remember about the second property of the levels: the price is more likely to beat off the line than pierce it. How it looks on the chart, you can check out in the post.
The trilogy about levels teaches us that the task of the trader is not to guess whether the level will pierce or not, but to react only to the fact of the level breakdown if this happens.
By the way, this is a good bot trade. A bot, unlike humans, is not distracted, is not tired, and does not make mistakes, if all options are set correctly.
Most frequently, the market for the second property beats off the level, and does not pierce it:
Approximately at this moment, during the last black candlestick, traders who bought the highs of a white forming candle, understand how the second level property works.
Approximately 70–80% of novice traders make such mistake, those who know about the second property of levels;).
The desire to predict is some kind of the psychological basis of most traders. We will talk in detail about it in a blog post about trading psychology.
Seriously, strategies based on trying to guess where the graph goes, have a special name — gambling. We, however, prefer crypto casino. It reflects more accurately.🙂
Like any money gambling, it’s fun, brings a lot of emotions, tales, but this is not a business built on trading in the financial markets. While playing, it is important to remember that gambling in 95% of cases leads to the loss, sooner or later.
2. The level must be pierced at the same time frame in which it was built.
This is the second required condition for breakdown trading.
If you have built support and resistance levels on the daily timeframe, and you are looking for an entry point to the market on the daily timeframe, then you cannot determine whether this level is pierced or not on shorter timeframes.
Let’s suppose that on D1 you see this scheme:
The candlestick closes at 24:00, and you have 15:00. You may come across with a peculiarity of the human psyche that is perfectly familiar to experienced traders. The desire to see if this resistance level has been pierced on shorter timeframes, and get ready in order to make a decision on transactions.
It is important to understand that this desire leads to the destruction of a trading account.
This is the same attempt to guess whether a level will be pierced, but disguised by some logical excuse.
So, following this temptation, the trader opens a shorter timeframe:
At H1, the resistance level will be denser. Let’s suppose the market grows and rises above the resistance level. Yahoo, the daily resistance level is pierced on the hourly timeframe.
Does this mean that the daily market will close higher?
Nope, it doesn’t. Piercing the level starts from piercing the 5-minute, hour, 4 hours, and so on. This principle does not work backward: piercing the daily level on shorter timeframes does not mean and does not guarantee breakthrough on D1.
Very often, if you look at how the market fluctuates near the daily level, these levels very are pierced often during hourly, 4-hours, 15-minutes levels, and then the market returns to the D1 level, and there is no breakthrough on the daily timeframe.
As a rule, if the market is pierced on H1, it fluctuates around the pierced level for some time, and then it moves down. The price returns inside the level, and on the daily timeframe you can see that after the close, the daily candlestick tests the level:
So, if you make a decision to enter the market, and your decision is based on the fact that the daily level is pierced on a timeframe of a lower order, then you act against the trading plan, and play cryptocurrency casino. Such mistakes are made due to lack of knowledge about the properties of support and resistance levels, or as a result of a violation of their trading plan. It is interesting that making a trading plan, approximately zero percent of traders indicate the need to guess at what point the level will be pierced.
Experienced traders are able to interpret info from different timeframes correctly, and combine them with profit for themselves. Trade in the direction of the trend, against the trend — there are many variants, but they come with experience.
The first part summary:
- We determine the entry and exit points on the impulse wave, at the stage of active market movement while rising or falling, when buyers or sellers are very strong. Buyers push the price upwards, pierce the resistance level and fix above it. Sellers push the price downwards, under the support level and keep it there, or push it even lower.
- To determine entry points, two options should be there:
- the level must be pierced by the body of the closed candle. Not her shadow, not a forming candlestick.
- the level must be pierced on the same timeframe where it was built.
- These rules are based on the properties of support and resistance levels, therefore they work on any timeframes.
- In order to use this method on shorter timeframes, you need to use additional filters. For example, trading sessions that are worth trading: periods with the strongest and/or predictable market movement, take into account the levels of long timeframes, and so on.
- This method of determining market entry points is universal.
Trade using break off
Trading using a correctional wave is also available for newbies.
How to determine the market entry points:
In order to form an entry point during the trade using a break-off, the price must pierce the level: open and close above it. Two scenarios will be next, they are highlighted in blue and green. These scenarios are testing the third property of the support and resistance levels.
The third property requires us to save the last pierced lines on the chart, not to delete them. They are needed if the price returns to them. This will show that the trend will continue its move. According to the third property, the cost can touch the pierced level, and it can even go lower than it, and punch the level again, already from the upside down. It can be considered too.
>>> Read also our special blogpost: Support and resistance levels: the third property or what happens after piercing.
With a growing trend, the market correction ends, not reaching the support level, and starts to grow.
Traders who trade using a break-off set a goal to enter the market when:
- the impulse wave is completed (the first green arrow on the left in the pic above);
- the correctional wave began on the image: one of two dotted lines upside down;
- the correctional wave has been exhausted: on the image, the third arrow on the left, the minimum value of the dotted line;
- the point for opening a position is at the beginning of a new impulse wave.
A trader who trades using a break of a level misses a signal that is formed on the first breakthrough of the level (the first green arrow on the left). He is waiting for a more accurate signal to enter the market if he begins to correct and beats off one of the levels.
There are a lot of ways to find the market entry point on the rebound, the market turning points (in the pic, the third green arrow to the left).
There is no perfect solution for finding this point. As a rule, the following two conditions are considered as breaking off:
1. After piercing the level, the market should return to it. The price should turn, and touch the pierced level:
Counter-trend candlestick on correction touches the pierced level with its shadow.
The price may touch its body or the shadow of a candlestick. The main thing is that the touch happens if the market moves due to counter-trend.
This condition is completed if the level that has touched the candlestick closes. Strictly following the fact.
2. The candlestick must close, which direction coincides with the direction in which we are looking for the market entry point. If we are looking for an entry point in a growing market, then the bullish candlestick must close. Please note: the candlestick must close on the timeframe where we work.
This condition is completed if this candlestick closes, also, strictly according to this fact:
The bullish candlestick of the correctional wave has closed near the support level.
By the way, no one knows where it will close. In our example, this may have happened before. Fibonacci levels give additional signals, using them you can determine the points where the market can turn. We’ll discuss these methods in the following blogposts.
So the bullish candlestick closes. After the bullish candlestick is closed, a buy signal is formed.
Piercing or breaking off the level is not enough to open a position in the market. Traders who regularly lose money believe that the first three points of the trading plan are enough. They will determine the direction of the market, build levels, and define entry points, and this way they plan to provide themselves a rich life. Unfortunately, it does not work. If you see that a buy signal has been formed, for a breakthrough or for a beat off, it means that you can follow №4 point of the trading plan, we will discuss it in our next blogpost.
How to choose trading strategies
What are your options:
What are the key differences
The key tactics feature on the breakthrough:
1. Strong emotional pressure. Breakthrough is a more aggressive way of trading. The breakthrough entry point is not at the beginning, but in the middle or at the end of an impulse wave:
Let’s suppose we’ve bought a coin at $100, TakeProfit set around $120. Then all the marks above $100 will bring us a floating profit, a drop below $100 is a floating loss. After a beat off, the market moves above the entry price; this is reflected in the trading account as a floating profit. In this case, after some time, the impulse wave will come to an end. Do you remember if we trade using a breakthrough, should we enter at the middle or at the end? Further correction begins, and it can be deep. Floating profit fades away, and a floating loss forms on the trading account. Now the most important thing: in terms of market logic, this is a normal situation. It does not make sense to worry about it, this is the main characteristic of this trading strategy. As you remember, the impulse wave always follows a corrective one.
The lower the market correction, the greater will be a floating minus. The market can be adjusted to the support level, and it will be OK for an upwards trend.
If you experience extreme emotional stress from when a floating profit turns into a loss, and all this lasts more than one day. Then this method is not for you. In this case, it is possible to trade using a rebound will suit you more.
2. A single trade based on a breakthrough can last for weeks.
3. Breakthrough trading generates higher entry prices.
The situation in the image below is absolutely typical:
Stats and logic show that the entry price for a break off is lower than at a breakthrough level.
4. So, the profit probability is less:
While trading using the breakthrough, an entry is at the midpoint or at the end of the impulse wave.
5. Low ratio of profit potential to risk potential.
Risk potential is a very important option. You need to know where to fix the loss if the market doesn’t follow the plan. The point of limiting risk for both strategies is at the same price level:
In our example during the growing market, it is around the support level.
So, the breakthrough strategy brings the potential profit 20, and the potential risk is 25, which is much higher than the similar ratio of tactics for a rebound. A low return to risk ratio means you can earn less, but the risk is high.
A risk to profit ratio is one of the key criteria, using it the quality of a transaction is determined. In order to increase your funds in the long run, it is important that the profit-risk ratio should be high. The higher, the better. The higher the profit potential in each transaction, and the lower the risk potential, the better.
5. If the market starts to move linearly, the rebound brings profit:
Sometimes there are situations when there are 2–3 breakthroughs in a row and no rebound.
The main features of the strategy on the rebound:
The result is visible immediately. The strategy requires fewer candlesticks because you do not have to wait until the correction ends:
Within 1–2 candles everything becomes clear, the market is moving in the direction you need, or it’s time to fix the loss.
- Lower entry prices;
- The profit potential is greater because the entry point is located at the beginning of the impulse wave;
- A high ratio of potential profit to potential risk;
- In the linear movement, traders simply observe, without having the opportunity to enter the market and make money: an analog of lost profits. For novice traders, such expectation can be quite painful, although in fact, if you don’t lose money, this is OK 🙂. Waiting for a position is also the position. By the way, waiting for a signal is called “square signal”.
Summary of the third part:
- You can choose which is closer to you, trading for a breakthrough or a rebound, right during the learning process, before trading on a real chart.
- There is no clear answer to this question.
- Both strategies vary in all indicators. In each individual transaction, the size of these indicators may vary. But the analysis of the average value of 100–200 transactions shows that rebound gives a higher profit/risk ratio. This means that you can earn less while trading for a breakthrough and lose more than with a rebound trade.
- Breakthrough trade gives a guarantee of participation in further market movements. If the market does not soar, but beats off and falls back down, it will drag off you.
- Trading on rebound gives fewer entry points, but it’s rare and can be justified by the quality of transactions.
- The choice in favor of a particular strategy is explained more by psychological compatibility than by profit potential or other options. Which of them allows you to sleep at night, this can be your one 🙂.
- Make 20 deals for breakthrough and rebound, and the answer will arise in your head 🙂.
1) There are two key trading tactics that determine the principle of entry into the market:
- impulsed trading strategies, or breakthrough trading strategies;
- strategies of entry into the market at the moment if the correction wave is completed with maximum probability or the tactics of trading on the rebound.
2) Your task is to choose one of these tactics or their combination. You can do this while trading on the market.
It is very important to be able to determine the entry and exit points of the market correctly. With a professional approach, the main points of the plan are the rules for managing funds and risks. Therefore, it makes sense to make a choice among tactics after having a closer look at the ratio of profit to risk and position volume. These questions we will reveal in the following blogposts. So, stay tuned!