Monday, April 30, 2012

Predicting breakouts

As repeatedly posted, predicting breakouts is one of the hardest tasks a trader can do. Even when you do predict it, its often better to wait for the breakout to fail or give a breakout pullback and enter after the price action has moved from chop to trending.

The simplest way to look at chop is to view it as a trading range. Taking a signal only at its very top (b41) or bottom (b63) is the best way to avoid being chopped up. Chops are often ill-formed channels and are often variations of three push Wedges. For example, b41 today was a 3 push wedge (b20, 23,41). However, reading wedges in chop is very hard in real-time and requires a lot of practice.

A strong trend entry bar confirms your entry was a good read (b42 was a trend bar compared to other entry bars null or bear), however holding through choppy waters is harder since effectively your trade is a fBO trade and it only needs to give two legs.

When the signal bar is clearly beyond the chop (b63) it is a far better entry and should at least retest the start if the last move (b41 high)


  1. Hi Cad,

    Why do you think that wedge was b20, b23, b41?

    Could it have been also b20, b23, b30?

    Or even b10, b23, b25?

    My understanding is that wedges are SO subjective that it's really hard to expect anything from them until they're of perfect shape. Otherwise, any 3 swing highs/lows can be referred as a wedge.

    For example, there was a perfectly looking two legged move down after b10 lower high when the channel was still wide - why this was not traded?

    Also, B17/B18 were LL fBO which could have been scalped up - why you were not trading those?

    Thanks in advance.

    1. W needs to be three successively higher pushes.

      2L move after b10: Not sure what you mean.. if you mean why b11 was not shorted, it was a poor signal bar and the outside bar b9 would have required one more move.

      b18 was an OK setup but a counter-trend setup with lots of overlap.

      You just can't take every setup that comes your way. You have to carefully consider if your entry will lead to a large move. If not, its better to stay out.

  2. Cad, why did you pass on the WfBO trade? Is it because you thought the market was breaking out? if yes, how do you define a breakout in general?

    thanks for your help!

    1. Actually I did take it, but it was an experimental setup so its not displayed.