Most of the time, you will observe a correction.Today we will go through a simple trading lesson, but an effective one. The example I will be using today in terms of timeframes is mainly focused on Swing Traders; however, these principles remain valid for any timeframe because of the fractal characteristic of the market. Also, this will be a bullish example, but the same principles apply to bearish examples.
Here, you will have a 4 step process to understand how to improve your executions on any asset.
1)Major Daily Trendline:
This is the main structure I have as context. The structure or trend must be evident, such as 300 days bearish trend, where we can draw a descending trendline. It's crucial when looking at these structures to see if they are close to a "major" support zone or if they have already made contact with them. That would be optimal! (Here I would use the weekly timeframe)
2)Breakout:
Assuming that the previous conditions on item 1 were fulfilled, now we are in a situation where we can expect a change in direction, and we are interested in developing a setup on the new "expected impulse." Most people fail in developing a good setup because they trade the first breakout of the structure, thinking that the price will skyrocket. As a general rule, consider this: "Never trust the first breakout" This takes us to the next item.
3)Correction:
After the breakout of a major structure like the daily trend of the last 300 days or more, we want to see a correction! Here corrections will tend to show some proportion to the previous structure the price is coming from. I draw an ABC pattern on this template, but the main idea is that you want to observe a clear retracement from the breakout where the price tests the broken trendline again or at least makes a clear consolidation of a few days.
4) Setup:
Now that we observed all the previous sequences, we can easily develop setups: Pending Stop order for our Entry-level above "B" on the flag pattern. Then, stop loss below "C" or, in other words, below the correction. Finally, take profit on the next MAJOR resistance level.
Why do this? Because you are adding filters before trading, and that way you need the price to fulfilled certain conditions which will have three major improvements: Increase the odds of engaging on a high-quality setup and the 2nd one avoid low-quality scenarios or fakeouts. Also, you will avoid overtrading because you need CONTEXT.
Thanks for reading, feel free to ask all your questions or more information related to this in the comments ;)
