The False Break Trading Strategy
This strategy is for you if you’re the type of trader that…
“Rayner, I need to trade with the trend, the trend is your friend but I don’t know when to enter”
If that sounds like you then this trading strategy is for you because we’ll share with you how we can hop on board the trend.
Illustration:
The market is in an uptrend like this, you do not know where to buy, you want to wait for the price to retest this area of support, let it break below support, and then quickly revert above it and close back above support.
When that happens, you can look to enter on the next candle open.
Stops a distance below the low.
Your target could be just before this recent swing high.
Why don’t we set above the highs?
Well, the problem is sometimes the market might come into these highs and then reverse down lower from it.
If you set it above the high, sometimes the market may not reach and then reverse back and hit your stop loss, you don’t want that. Let’s be conservative.
You’ll have your stop loss just before the recent swing high.
Example:
I just want to share with you that the strategies and techniques can also be applied to the stock market.
If you recall this strategy is pretty straightforward.
We are looking for the market to be in an uptrend and then retest an area of value.
You can see the market is in an uptrend and retest this area of support.
As you can see, the market broke below support.
Many traders would think…
“Oh man, this is a breakdown time to short this market”
But I think by now you know if the market is in an uptrend and breaks below the lows, there’s a good possibility it could reverse up.
You can see that we have a green candle over here. But at this point, I wouldn’t be interested too long just yet.
Because there is a relatively long upper shadow or upper wick as you can see over here:
I rather hold my horses and see how the price behaves the next day price.
The next day, we have a higher close. So, we have a false break setup.
This false break is a little bit different from our previous false break. This one requires two candles.
But still, it is a false break because the price tried to break below this low only to close back up above support.
In this case, some of you might be thinking…
“Rayner, I don’t want to be buying these highs over here it’s a pretty high”
What you can do is one technique I can share with you.
If you are a cheapskate like me, I don’t like to buy at high prices you can place a buy limit order below the previous day’s closing price.
Here is what I mean:
Let’s say the previous day, the price closed at $20, you can set your order and $19.
This gives you a better entry price and would have improved your risk to reward on this trade.
In this case, let’s see what happened the next day…
The market gapped up higher. Here’s what I mean:
If the market gapped up higher, you wouldn’t be filled on the trade.
What you can do is you can still leave your buyer limit order there until it reaches your target then you can remove your buy limit order.
This is what it would look like.
This is a long position.
We placed a buy-limit order at $19.07. Stop loss a distance below the lows because we don’t want to get stopped prematurely.
Target a distance before the recent swing high.
The market shows signs of reversal but we haven’t gotten filled on this trade because we have a buy limit order and right now the market seems to be against us.
But remember we are trading in the direction of the trend.
If the market were to hit our stop loss, it has to first break below this area of support which is like a barrier to hold up this higher price so the market has to work hard to reach our stop loss.
Let’s see what happens next…
We have gotten filled on the buy limit order and now the market seems to be against us but remember, we have a stoploss in place.
Let the market do what it needs to do remember we are trading in the direction of the trend.
If the market were to hit our stop loss, it has to first break below this area of support which is like a barrier to hold up this higher price and so the market has to work hard to reach our stop loss.
Let’s see what happens…
In this case, the market reverse-down took out these lows over here:
Now you understand why I always set my stop loss you know distance below the lows. Because if I set it at the lows I would have gotten stopped out on this candle over here.
But since my stop loss is here, I’m still safe for now in this trade whether it’s a winner or loser, right?
In this case, the market then slowly consolidates and then finally starts to show signs of reversal reaching our eventual target.
This is a very useful technique that I use.
The First Pullback Strategy
This is for traders who always buy the breakout, but the problem is you see the candle, the breakout is huge, you buy, and the market reverses and you get stopped out.
Why is that happening?
Well probably is because you’re chasing breakouts.
This strategy is to help you avoid chasing breakouts and avoid unnecessary losses. This is what I call the first pullback trading strategy.
It looks like this…
The market is in a range, it breaks out and then pullback forming something like a bull flag pattern.
If you overly the 20-period moving average, you’ll see the 20MA support the price.
You’re waiting for the low of this build-up to touch the 20MA.
Once it has done it then the price starts going up higher.
You can place a buy-stop order above these highs and if it breaks up, you go long and then you trail your stop loss to ride the trend higher.
Example
You can see that we had a breakout over here on this candle recently.
Many traders would say…
“Rayner, this is bullish is time to buy, it’s time to go long”
But the problem is where you can set your stop loss. You can reference the lows and this could be a very wide stop loss, this is what I mean:
Is there a better way to go about it?
Yes…
That’s what I call the first pullback strategy which I’ll share with you.
In this case, you can see the market starts to reverse so at this point, traders who buy the pullback are probably sweating out on me.
They have gotten stopped out, especially those who have a tighter stop loss.
You can see it starts to consolidate over here…
Remember at this point, we also use the 20-period moving average to overlay it.
You see the price has already retested 20MA, this tells you that the market has digested the recent breakout move and it has stored enough energy to stage the next breakout higher.
What you can do is place a buy-stop order above these highs for traders who prefer the candle to break and close above the highs, that is still fine.
The market did eventually break about these highs over here and continues higher.
I don’t have a fixed target over here because you can see the price is trading at a no man’s land.
There is no price structure and resistance nearby, you can trail a stop loss to ride the trend higher.
There’s a 20-period moving average that you can use to trail your stop loss.
If the price breaks below the 20MA you exit the trade.
