Thought I'd start a thread about this important topic.
As an intra-day trader, I look to go long or short depending how price reacts to a major level. IOW, I stay 100% neutral bias and only expect a good move from a level, not a specific direction. That way I can profit from bounce or breakout.
In my experience, three scenarios related to price action are common at a major level:
1) Bounce ( reversal)
2) Breakout (price runs through level)
3) Chop (price chops around level, then finds direction)
The question then becomes, can each scenario be predicted to any useful degree? And if so, how?
So now I look for common threads in lead-up price action that give "clues" as to how price will react at a major level.
These are my observations. Please note, that all price action observations are made from a 10 or 30 second candle chart. I hope others will contribute their observations, as well:
1) Bounce (reversal)
a) if a level hasn't been touched for awhile and price hasn't traded close to the level, a 1st touch reversal is more likely.
b) on most days, reversals are more common to the upside (when encountering resistance).
c) on heavy trending days, 1st touch reversals counter-trend often fail (then evolve to breakouts or chop).
2) Breakout
a) Momentum. If momentum is hard going into a level, price is more likely to breakout.
b) Direction. If direction is down going into a level, price is more likely to breakout.
c) Momentum + Direction give a higher probability breakout setup. Although price can still reverse or chop.
3) Chop.
a) Happens frequently around major levels. Price will dip past level, then go back the other way, then consolidate.
b) Consolidation break-out indicators can be useful here. Fast bollinger bands or other breakout tools can be helpful to gauge direction at consolidation.
Putting it all together.
The idea is to capitalize on at least 2 of the 3 conditions stated. Some traders assume one condition, and focus and trade just that (and profit!).
In my experience, here are some pitfalls with that:
1) Trading only breakouts.
While I've heard this can work, chop creates significant drawdown as price tosses around a level. Further, even some 1st bounce reversals often pass a level by a few ticks (triggering limit orders), then slam back down (or up).
2) Trading only reversals. Again, this can be profitable and from what I hear, how many big players trade. However, breakouts slam reversal traders. And chop can often end with a failure to the downside.
3) Trading only chop. Breakouts are missed. And reversals are often missed. Although drawdown isn't as heavy, assuming a good chop indicator is used.
So how does a trader make sense of all that??
Well, here's how I trade it:
As price approaches a major level, I Wait-and-watch for a breakout. If price reacts to a level, then put on a reversal. Then if price retests and consolidates, wait for a breakout.
Assume breakout > reversal > consolidation.
Be interested to hear how other veteran traders navigate major levels. What they look for. Common price action etc?
As an intra-day trader, I look to go long or short depending how price reacts to a major level. IOW, I stay 100% neutral bias and only expect a good move from a level, not a specific direction. That way I can profit from bounce or breakout.
In my experience, three scenarios related to price action are common at a major level:
1) Bounce ( reversal)
2) Breakout (price runs through level)
3) Chop (price chops around level, then finds direction)
The question then becomes, can each scenario be predicted to any useful degree? And if so, how?
So now I look for common threads in lead-up price action that give "clues" as to how price will react at a major level.
These are my observations. Please note, that all price action observations are made from a 10 or 30 second candle chart. I hope others will contribute their observations, as well:
1) Bounce (reversal)
a) if a level hasn't been touched for awhile and price hasn't traded close to the level, a 1st touch reversal is more likely.
b) on most days, reversals are more common to the upside (when encountering resistance).
c) on heavy trending days, 1st touch reversals counter-trend often fail (then evolve to breakouts or chop).
2) Breakout
a) Momentum. If momentum is hard going into a level, price is more likely to breakout.
b) Direction. If direction is down going into a level, price is more likely to breakout.
c) Momentum + Direction give a higher probability breakout setup. Although price can still reverse or chop.
3) Chop.
a) Happens frequently around major levels. Price will dip past level, then go back the other way, then consolidate.
b) Consolidation break-out indicators can be useful here. Fast bollinger bands or other breakout tools can be helpful to gauge direction at consolidation.
Putting it all together.
The idea is to capitalize on at least 2 of the 3 conditions stated. Some traders assume one condition, and focus and trade just that (and profit!).
In my experience, here are some pitfalls with that:
1) Trading only breakouts.
While I've heard this can work, chop creates significant drawdown as price tosses around a level. Further, even some 1st bounce reversals often pass a level by a few ticks (triggering limit orders), then slam back down (or up).
2) Trading only reversals. Again, this can be profitable and from what I hear, how many big players trade. However, breakouts slam reversal traders. And chop can often end with a failure to the downside.
3) Trading only chop. Breakouts are missed. And reversals are often missed. Although drawdown isn't as heavy, assuming a good chop indicator is used.
So how does a trader make sense of all that??
Well, here's how I trade it:
As price approaches a major level, I Wait-and-watch for a breakout. If price reacts to a level, then put on a reversal. Then if price retests and consolidates, wait for a breakout.
Assume breakout > reversal > consolidation.
Be interested to hear how other veteran traders navigate major levels. What they look for. Common price action etc?
