Line breaks are the main types of entries I use. This style of trading is commonly called Breakout Trading. However, this breakout trading is a little different than most types of breakout trading. The main difference is that I like to use my brain when deciding to enter. I do not robotically enter the moment a line is broken. There are several factors that dictate whether or not I get into a trade, and if I get in to the trade, when I get in.
Candle Movement (momentum): This is probably the I will main factor in determining whether or notenter a trade. Some people have trouble understanding what momentum is so I will try to explain it as best I can. As far as I am concerned it is a simple concept. I believe the people that have trouble understanding momentum are overcomplicating things.
Momentum simply refers to the speed at which the candle is moving. If the candle is moving very fast (moving up/down a few pips at a time without stopping much or at all), then the candle has strong “momentum”. If, instead, the candle is pushing up 1 pip at a time, and every few pips it stalls and reverses slightly, then the candle has weak “momentum”.
So, if a candle with a lot of momentum crosses either a scalp line or an S+R line I will enter right away. I do so because the candle already has momentum and the line break is likely to give it more momentum as new traders jump in. If I hesitate at all it could move 20 or more pips before I manage to enter. If, instead, the candle has very little momentum, and it is slowly crawling its way up/down when it crosses my line, I will hesitate. I do so simply because I do not have much confidence in the strength of the move. My hope is that the break of the line will give it the momentum it requires to begin to move, but I want to see that momentum first. If as soon as it breaks the line it jumps up 3-5 pips I will probably enter. Sometimes you will find a line is broken by 2 pips and then it completely reverses. This is why I am wary of moves with slow momentum. As a trader, I am trying to protect myself from entering a break that is not really a break.
Determining momentum comes down to the “bulls” and “bears” I talked about before. A bullish candle with a lot of momentum shows that the bulls currently have a lot of power and the bears have very little power. Conversely, a bearish candle with a lot of momentum shows the bears have a lot of power and the bulls have very little. So, if I am looking to enter a Bullish trade and a candle with a lot of momentum crosses my line I know the bulls have power and I enter without hesitation.
Again, using a bullish candle as an example; if the candle is crawling up 1 pip at a time and constantly stalling, it suggests that the bulls currently have more power. However it also suggests the bears are fighting the move and trying to pull the price down. So, if my line is crossed only slightly, I am concerned that the bears can use the barrier the S/R line provides, and gain the upper hand, thus reversing the momentum. It is essential to remember that every single pip movement represents a struggle between the bulls and bears. Candles are a tool that tell us who is winning that struggle at that moment, this is why it is important to be able to read candles.
Line Strength: Line strength is simple to gauge. If the last time the price approached a line the price got stuck in a range on the line I would be very cautious about trading that line again anytime soon. At best, I would consider the line a very a weak line, but more likely a completely invalid line.
In the picture below, highlighted in red, you can see a range that is stuck on a line. A range like this severely weakens the line. There are two ways the line can recover. First, if price moves well away from the line (200+ pips), and stays away for about a week, I might consider trading the line again. This is because the line has had time to recover. However, I still consider the line risky because it has not displayed that it has regained is strength. I am only assuming it has. I will probably trade the line, but I will be very cautious in trading it. I might enter with a reduced position, stop loss or both.
Secondly, a much better way for a line to regain its strength is for the line to completely reject the price. If you look at the picture below you see a range stuck on the line (highlighted in red), and a strong reversal from the line (highlighted in blue). The bounce from the line immediately makes it tradable again. You should be looking for the same kind of ‘V’ or ‘U’ shape in order to identify a scalp line.
You should also take into consideration the strength of the bounce. If it is a very weak bounce, it is not significant. I want to see a strong move towards the line, a bounce, and a strong move away. There is no exact amount of pips I want it to move, it is a judgment call I make at that time.
Previous Breaks: Every time a line breaks in the same week it gets more and more likely that the next break of the same line will not make for a successful trade. So after the first break, the chance that the second will make for a good trade is less likely, and the third break is even less likely. I will sometimes take the second break of the same line in the same week. I rarely take the third break, and I never take the fourth. I also expect to see at the very least 6 candles, and a 100 pip move between breaks. If there is not 6 candles between the first and second break, or the break of the first did not move at least 150 pips from the line, I will not trade the second.
Taking a look at the chart above we have 4 breaks of the same line in the same week.
- The first break was a normal S+R line break and I would have entered.
- The second break had 6 candles in-between breaks and moved at least 100 pips ways so I would have taken it.
- The third break moved at least 100 pips but we only have three candles between breaks so I would not have traded it.
- The fourth break I would not have traded because I do not trade the fourth break.
Vicinity to S+R Zone: S+R zones are no trade zones for me. If the line is too close to the S+R zone I will not trade the line break.
The general rule is: If the normal target of the line break will take you into the S+R zone it is not tradable. So, if a scalp line is 50 pips or less from an S+R zone it is not tradable. If an S+R line is 70 pips or less away from an S+R zone it is not tradable.
