Monthly Archives: December 2013

Expecting a Breakout Failure

I recently posted the following image on the YourTradingCoach Facebook page.

For the sake of this article, ignore the text in the yellow box.

Actually… don't ignore it… put it aside for now but do think about it later. It's incredibly important and may well reveal to you the real essence of trading psychology.

But for the sake of this article, let's focus on the trade.

The facebook post generated the following comment from a reader:

There is no reason to buy till I can recognize a changeover of power!

This is an absolutely valid comment given the lack of context provided in the facebook image, as touched upon in my reply:

This chart is missing all the wider context that comes from HTF and earlier TTF price action. Any discussion of long vs short vs stand aside is not really possible just from this small snapshot of data. The point of the post though was not the trade, but the text regarding fear and trading psychology. (There was good reason to go long though!)

So let's look at the trade in a little more detail.

It's important, because it reveals a different way of thinking that doesn't necessarily require you to wait for a clear and definitive "changeover of power".

First let's look at the higher timeframe S/R framework:

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Reviewing Key Price Action Sequences

A great way to learn to read price action is to review your historical price charts, with a focus on the price action at key structural locations.

Find and review anything which fits these categories.

  • tests of significant levels
  • breaks of significant levels
  • traps
  • transitions between trends and ranges
  • transitions from volatility contraction to expansion
  • and in fact anything else that stands out on the chart

 

Each day, identify a key price sequence.

Study it and learn.

It only takes a minute.

Let's look at an example in which Crude Oil breaks higher in Monday's session, into layered levels of range resistance, before falling back into the range.

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A Failed Break of a Range will lead to a Test of the Other Side

Here's a great email question from a reader:

Question:

I'd like to get your opinion about a question I saw on a forum. To be honest I wonder if there is a proper answer but nevertheless I think this behaviour occurs often. It is a form of strong rejection at an extreme of a range leading to the other extreme. Is it just a form of self-fulfilling prophecy?

I'm curious why when a trading range is violated, then rejected and comes back into acceptance (or previous range) does it usually go to the extreme other side of the range? Just curious what would be the thinking behind what is going on behind that action.

Response:

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