Wednesday, January 18, 2012

Pause bars after breakout


In general, the best entry after a breakout (BO) is a breakout pullback (BP). Some traders enter above the breakout bar and this is dangerous since the pullback could be large, potentially stopping you out. Sometimes there is a small trend bar right (b4) after the breakout bar(b3). This bar could be of either color, but best if its a non-inside bar of the same as color as the breakout bar. You can enter on this bar with a stop on its other end.

The reasoning is that a real strong breakout of a new trend is likely to continue further up before a pullback. Therefore, this is applicable to b4 for example and not b36. Note that the breakout bar preferably has to have a strong close (shaved or 1t). Tails on the breakout bar are likely to cause pullbacks, so you are better off entering on a BP.

If there is no pause bar or if you are uncertain if the pause bar is a proper trend bar, its best to let the breakout progress and wait for the first pullback. A pullback right after the BO bar can be shallow but acceptable as long as you are entering on a strong signal bar. If the pullback is after an extended move, you need to wait for a deep pullback. In today's trend break that would result in an entry above b29 (since b23 is not a deep pullback).

9 comments:

  1. I entered unfortunately on B23. Given that it was 2 legs down, landed right on top of the EMA and had what looked to me like a good SB I'm feeling frustrated with how to avoid this in the future. Is it just experience that enables you to eyeball that and determine it isn't deep enough PB? Is there any rule-of-thumb? A2's which seem like they should be easy give me problems. Thanks

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    1. counting from the outside bar b22, b23 was only the first attempt to end the pullback, it was also overlapped with the trading range, forcing you to enter mid-range.

      Remember A2 needs to be a deep pullback on all days except soft-trend days. If the pullback isnt deep, wait for a second entry.

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  2. I took bar 10 as the 1pb and went long. Is that a valid trade?

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    Replies
    1. Yes, its a 1PB off a weak signal bar.

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  3. Dan--great question. My take is that b23 had too much overlap w b22 and in fact is an ib. b22-25, in hindsight, is a TR. something tells me you weren't alone.

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  4. Hi Cad,
    Al mentioned in the room, that follow through bar 4 overlapped with yesterday's tight trading range. Do you care for this?

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  5. He mentioned b4 being a breakout of the TTR defined by b65 low and b67 high from Yesterday. There was also barb wire at bars 78-81 on that day.

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    Replies
    1. I understand, but the chances of a trend developing in the first hour far outweigh the risk of failure. This is why you wait for a small bar. If you are stopped out, you lose a point or two, but if the trend succeeds, you make 4 to 8 points.

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