Short answer is let me Mentor you. Longer answer is below.
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First thing to do is to learn how to spot snd correctly draw Consolidations. Many people have different ways of doing this but the way I found to do it is the most accurate. This makes the difference in correctly determining when a Breakout has started or if it is still within Consolidation.
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The 2nd thing is to determine if the Consolidation is wide and Stable enough to be traded with little chance of whiplashes etc. Smaller Charts on the 1 Hour and lower are nice to trade because of lower Stop Losses. Howewer…they tend to have setups that are less reliable than those of the Daily and 4 Hour which is why I trade on these time frames. The more stable the setup…the more reliable the signals they provide with less chance of false signals
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The 3rd thing is to choose your Entry Signsls. This where you will have those who prefer Indicators vs those who use Support and Resistqnce and thise like me who use Candlesticks. Here are several options that I have tried which are very popular as well as the one that I now use.
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Indicators…useful…many people use them but I always found them to be slow in indicating the start of the movement back to the other side of the boundary.
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Resistsnce and Support as Entries . This is where you open positions when these boundaries are hit and then waiting for the reversal. Stop Losses are placed outside the boundaries and the Target Set as the market reverses.
Advantages
This is useful since you can get in early and maximize on the movement. If the boundary is strong enough, you also wont need a large stop loss. This allows you to trade with a large Risk Reward Ratio.
Disadvantsges
Many times the market will overshoot the S/R boundary before Uturning. This can lead to an initial loss which then create a dilemma for you. Was it a temporary spike and you just need to re enter or is it actually gonna breakout?
Also because SR boundaries are not perfect, you never quite know how wide your Stop Losses need to be. Sometimes I only needed 10 or 30 Pips…other times it was 50 to 80.
Also, since the market can reverse without actually hitting the boundary, it was sometimes unclear whether to enter 10…15…20 Pips before the boundary was hit lr to only wait till they are hit to be sure.
Candlesticks on the Daily and 4 Hour
To solve thise issues I decided to focus on trading the Larger and more Stable Setups of these time frames using Candlesticks.
Advantages
These Charts are less likely to give you false signals and the Candlestick Signals act as confirmation of the start of the reversal. This eliminates the uncertainty associated with SR based entries.
With Candles…you also can see exactly where to place your Stops…the High/ Low of the signal.
The key however is knowing which Signals are the right ones to trade and ensurung that they are in sync with the Consiidation type. For example, a Bullish Engulfing Canlde might be appropriate for the Consolidation you traded yesterday but may actually be too weak for the one you trade tomorrow.!!!
Disadvantages
Because we are trading on the larger charts…larger stop losses are needed. This is generally wjy people trade on the smaller charts - its “cheaper”. However the larger number of false signals because of the greater volatility of these charys can make the losses from those smaller stops add up to quite a lot.
However, given the greater reliability of these signals on Daily and 4 Hour and the greater strength of the Stop Loss Areas, fewer losses will be experienced.
Plus…by forgetting about breakouts…you actually will find greater opprtunities for profit. Not only can you trade after the Consolidation has been formed with clear Support and Resistance Lines. You can also trade the waves that form the Consolidation.
Once you can spot these waves early and see that the market is in the process of forming these Consolidations…
…you can take advantage of them for strong gains as you can see here on the GBP JPY 4H a few weeks ago…
Duane
DRFXTRADING
