Monday, October 31, 2011
Anticipating late trend breaks.
On a large gap day where the open is beyond the range of the prior day, the likelihood of trending is high. If the first bar does not lead to a hard trend, there is a very good chance it will at least attempt to pullback to the ema and then break into a trend in either direction.
Once the day has stalled into a trading range, any trend break is likely to happen from the other end of the range, i.e, bull trend breakout from the bottom of the range and bear trend from the top of the range. This is why you should only buy low and sell high in a trading range.
A 1tf such as the one on b24 could lead to a trend but when the range is small, the likelihood is lower. A trading range typically tries to widen before it breaks into a trend. A common way to expand the range is to take out repeatedly both ends of the range until the range is wide enough. This is an expanding triangle breakout and any sharp breakouts can be faded until an upside break and 2L HL or a downside break and 2L LH.
The second option is to give a breakout pullback. b36 was a strong breakout of the trading range and gave a LH 3 push pullback to b53, which was also a DP. These are usually trend generators and should be taken.
Entering mid-range such as the entry at b28 should be avoided unless you have reason to believe you are in a trend (LL and LH) or you are entering on a BP. In general your best swing entries are near the ends of the trading range after the trading range has been made sufficiently wide by prior failed breakouts.