Here are the illustrations shown in this portion of the School lesson:
Illustration 1 (representing the “Aggressive Way” of trading a break)
Illustration 2 (representing the “Conservative Way” of trading a break)
In each illustration, price is initially moving [I]down,[/I] and it is approaching a barrier. The barrier in this case is a [I]support[/I] level, because it is below the current price.
If price is moving down, as it is in the illustrations above, and if you believe that it will fail to break through the support level it is approaching, then you might consider [I]trading the bounce,[/I] as we discussed previously. Clearly, a bounce would be [I]upward,[/I] back in the direction price came from, and you would be considering taking a LONG position [I]after the bounce.[/I]
On the other hand, if you believe that the support level will fail to stop the downward-moving price, then you are expecting a continued down-move. In this case, you might consider [I]trading the break[/I] of the support level, by taking a SHORT position [I]after the break.[/I]
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Two more illustrations could have been given in this lesson, representing a [I]rising[/I] price which is approaching an overhead barrier. Such a barrier would be called a [I]resistance[/I] level, because it would be above the current price. If price is rising, and you expect the resistance level to hold, then you might consider a SHORT position, [I]after[/I] price has failed to break above resistance. But, if you expect price to break through the resistance and keep moving upward, then you might consider a LONG position, [I]after the break.[/I]
Well, that’s surprising, because the so-called “aggressive” way is simpler than the so-called “conservative” way. Let’s run through both.
• In the “aggressive way” (illustration 1), price is moving down toward a support level. Maybe you expect price to break through support, or maybe you have no clue.
If you expect the break, you might place a SELL order at a prudent distance below the support level, in order to enter SHORT after the break.
On the other hand, if you have no opinion about what might happen when price encounters the support level, you might just sit and watch. Then, when you see price break the support level, and move significantly below it, you might choose to place a [I]market[/I] SELL order to go SHORT.
Clearly, in the opposite scenario (not illustrated in the lesson), in which price is rising toward a resistance level, you would be looking for a LONG trade in the direction of the continuing up-move.
• In the “conservative way” (illustration 2) — again, looking at a downward moving price which is approaching a support level — you are not confident that price will blast right through the support level, and continue downward, never looking back. Instead, you suspect that, after price breaks the support level, a cluster of buy-stop orders resting just below the support level will drive price back (upward) toward the broken support level, which now is expected to be a resistance level. This is the part of the price move labeled “pullback” in illustration 2.
So, you don’t “aggressively” SELL the break on the initial penetration of the support level. Instead, you wait to see price retreat to the broken support level, and you wait to see whether that level — which is [I]now resistance[/I] — will stop price from continuing higher. If it does, you enter a SELL order to go SHORT, anticipating a continuation of the original down-move.
As in the example of the “aggressive way”, there is clearly an opposite scenario, in which price is initially moving upward toward a resistance level. In this scenario, you would trade the break by going LONG at an appropriate level above the broken resistance level.
I hope that clears things up for you.
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