Breakthroughs - true and false
It's a truism: any trend, even the most powerful one, consists of several stages and ends sooner or later. And any price level, even the strongest one, will be broken at some point. And when the price makes another breakout attempt, every trader asks himself a question: is it possible to estimate in advance what is more probable today, a breakout or a rebound? And after the market has already jumped over the level and overcome an "en" number of points, Is it possible to distinguish if it is true price break Or false?
Breakdown or no breakdown?
Usually they offer rather primitive recipes. If we pass so many points, it means we have a breakthrough. Less than that means no. Or, for example, it is recommended to wait for the close of the day or 4-hour candle. On the one hand, this advice is reasonable - as they say, it will be wiser in the morning. But until you wait, especially if it is a real breakout, you will miss a good deal. And the day's close does not always provide a complete guarantee.
Also, some write that true breakdowns occur less often than false ones, and, they say, a professional tends to work anti-jamming. But a breakdown is not the same as a breakdown. In practice we know how fast and easy money can be made on another day, when the price, having sold a strong support or resistance, flies several dozens of points in the first minutes, and then follows a series of several white or black hour candles with short stops at intermediate levels. By the end of the day the currency can move away from its recent quotes. There were cases of breakouts as high as 500 or 1000 points. Even the movement within a hundred points after the break-down is a regular occurrence. What to do? And is it possible to understand more or less reliably in advance what we are dealing with?
Once a favorite subject of philosophical discussion was search for the first elementof which the rest of the world is composed. As such, air, fire, earth, water and ether were suggested. However, these ideas could not withstand the criticism of those who built their views on at least all five elements. The alchemists were looking for a philosopher's stone that would turn at least something, if not everything, into gold. Later the atom was proposed as the only brick of the universe, but then it turned out: not only the atom itself, but even its constituents - nuclei, electrons and even smaller particles behave completely unscientifically, unless one assumes that each particle consists of several more first particles. And that, if we don't go deep into quantum theory, is "wave-some-particle.
The simplest filters for false positives
All the charms of trading on the breakout, I hope, the reader can easily assess or have already assessed for himself. To do this, it is enough to carefully look through numerous price charts of different currency pairs and conscientiously calculate the possible profits. However, I will focus my attention on the subtleties and side effects.
How to weed out situations that are not worthy of our trust, similar to breakdown? How to identify failed breakout attempts? Let's move in order and start with the simplest ones.
First filter
First of all, I would recommend not rushing into small movements that are slightly out of the price zone within the random fluctuations, the so-called "noise". Anything less than 30 or even 40 pips for the major currency pairs is usually just random fluctuations, so this is a reasonable minimum movement to open a breakout trade. For the crosses, the minimum size of a move out of the price zone should be no less than 50 pips, and sometimes, during the periods of supervolatility (strong daily fluctuations) up to 70 pips. So the small movement size is the first filter (see Fig. 1).
More often than not, small price moves out of the zone are good opportunities to trade against a potential breakout rather than sideways. This is generally not puncturesbut, in fact, fluctuations within all the same price limits, but only within the margin of error. Since price zone - It is a strong structure, and usually extinguishes such small attempts to go beyond its limits at the root. Once the price stops for 15-20 minutes, refusing to update the extremes, and that's it, usually you can open a trade against a breakdown attempt (see Fig. 1).
For example, when trying to break through upwards, the price goes a little bit higher than the border (say, 20 points), and then either goes down to the border again or rises, but cannot move further than the above-mentioned 20 points. Or it breaks the first peak for 3-5 points - and that is all, it goes back. Such behavior is atypical for a true breakdown and suggests that the market considers current prices too high and the big players are ready to use them to open the most profitable sell deal. Figure 2 shows the same situation on the 5-minute timeframeso you can see the details.
It is necessary to make it clear. When there are references in the literature to numerous false-breaks, they usually refer to these very modest movements. Professional traders in general are not inclined to call such small jumps the loud word "breakout". However, it should be noted that after such an unsuccessful breakout attempt, it is necessary to correct it, to move the border of the price zone at the extreme price that was displayed. Now, if such a price is repeated in the future, this would, of course, mean that the pressure on the zone boundary persists and the probability of a real breakdown is increasing slightly. However, the confirmation of the breakout now will only be a break of the new extreme boundary of the price zone.
Second filter
A second filter may be the seriousness of the price range itself. A breakout attempt is often a fake one if it is just an intraday level, which is not important for a larger technical picture (4-hour or daily charts). Only one of two cases makes sense to trade during such a breakout:
1) when the breakdown occurs on the background of really important, even unexpected news informationThen the movement can continue and even lead to a breakdown of the whole technical picture;
2) when there is a significant price level before the next noticeable ample supply by distance, it would mean that at least a move toward the nearest level is very likely.
If none of these conditions are present, then caution with such a "breakout" will not be superfluous: a deal in this case it is better to open only after the appearance of any of the trading signals that you know well.
Rightly disperse.
Further information for your pondering: for a successful breach It is important that the acceleration of the price just before the breakdown is sufficient, but still not too great. In order to kick the door, you have to get a good spread. If you just push against it with your whole body weight, it won't work. But if you run for a kilometer, by the time you get to the door, you won't have enough strength to knock it off its hinges. With some experience, a person intuitively estimates how far to go and how exactly to take action.
Oddly enough, the analogy with a level breakout is almost complete. When you see a market attempting a breakout after a day or two of sitting around a level that's already boring everyone, there's a good chance of a one-time jump beyond that price boundary. But such a jump can happen by chance or be triggered by a minor event, so there is a high probability that the breakout will be false. Traders say that such the breakthrough is ill-prepared. And vice versa, when before the breakout attempt the price has already passed much more than its average daily path for the day, the movement is exhausted. And then it is also difficult to make a true breakout: too many participants are "tired", that is, they want to lock in profits after such a strong price change. For example, if growth continued all day long, the majority of the market may not want to buy at such "unfairly overpriced" prices. In this case prices, even if they go over the border, can't move much further that day. After all, just a few hours ago the co.
The prices were much lower and more profitable, and everyone remembers that. So the market has much more reason to make on a day like this good rollback, то есть оттолкнуться от уровня. А если причин для новой попытки пробоя достаточно, то уже на следующий день или через пару дней, хорошенько разогнавшись, можно «снести дверь с петель» по-настоящему — совершить полноценный пробой.
Fundamental filter
There are several variants of such a filter. One of them is the situation when an attempt to break the level occurs after the release of insignificant, minor news information. Such events can cause a small, sometimes jump-like jerk of the price, which gives the impression of the beginning of a decisive movement. But only for beginners, experienced traders are well aware that minor news can become a catalyst for a real breakdown only in very rare cases, when the currency was prepared for it by the entire technical picture that had developed before, or when there were numerous other important fundamental factors in favor of a breakdown for a long time. Thus, one reason to follow the "foundation" is a justified desire to know how serious the causes of a particular movement are. With this knowledge, traders who master both technical and fundamental analysis can achieve more in the market.
The hardest part: analyzing the breakdown ex post facto
If a breakdown is not immediately rejected as false by the already listed filters, a detailed analysis of the situation will require much more time and space. Of course, it is impossible to do it within one small article. Многие варианты и алгоритмы анализа я подробно описал и проиллюстрировал на конкретных примерах в своей книге «Искусство быть смирным: механизмы принятия торговых решений на рынке Forex». Книга выйдет в июне в издательстве «Альпина Бизнес Букс» с большим CD-приложением (продолжительность записи — около 12 часов). Заказать книгу или задать интересующие вас вопросы можно мне на электронный адрес: bg@teletrade.ru
I would also like to mention here general approach: it is important how firmly prices manage to consolidate behind the already broken line and what is the price dynamics shortly after the breakout attempt. In particular, whether prices are trying to overcome the high (low) initially reached at the breakout or not.
The cautious attitude towards breakdowns is, to some extent, justified. And yet, fear the wolves - don't go to the forest. The general statistics of opening reasonable trades on breakdown (the key word here is "reasonable"!) turns out to be significantly in favor of the trader and promises profits rather than losses. Nevertheless, a trader can do a lot to correctly interpret what a true breakout is. Most often it can be distinguished from a false one. Of course, alas and unfortunately, not always, but... the percentage of errors is not so high. Therefore, every time we open trades in such situations, using the right principles of money management, we can make statistics work for us.
What's interesting is that even in a questionable situation. possibility of price movement towards a breakthrough usually exists. Therefore, opening a deal on a breakout even in such a case can be justified, but with known precautions. The best of such measures is to choose the moment of testing the broken line for entry. Another measure is not to chase too big profits in the situation of insufficiently justified breakout attempt, but to be satisfied with small profits. And the last measure is to avoid such trades if your trading account is quite small. For a trade with a small deposit, it will be better to choose another, more encouraging situation.
"Conditionally true" breakthrough
Here is an example of a breakthrough that is explored in more detail in a chapter of my book (see Figure 3).
One extremely interesting example of a "conditionally true" breakout (see Figure 3) is a breakout that is true and useful for anyone trading intraday for an entire week, but with no long-term consequences. We see a nice upward price move after the upper boundary breakout. However, in the absence of a strong trend, testing the broken boundary may capture the entire thickness of the broken zone. The nature of further movement should alert the trader: the upward bounce from the tested zone is weak, and the dynamics of fluctuations after the bounce does not allow the price to consolidate at the upper levels. Buy trades during the first two upward spurts brought good profits. However, now the price is likely to return down to the previous corridor, and it is wise not to hurry with purchases.
In the footsteps of Sherlock Holmes.
By the way, this is one of my favorite techniques: to take a specific situation, and in the course of discussing it, to formulate general principles of work. In mathematics, this method of thinking (from a particular case to a general one) is called induction, and it often makes it easier to understand a theoretically more complex issue "on one's fingers", which then becomes easier to see in its entire relationship to the whole.
The opposite method of cognition is considered to be deduction, which allows one to come to specific conclusions on a specific issue of interest to the researcher from general universal statements, axioms, laws of nature, as well as with the help of individual facts and logical inferences.
A well-known example of the opposite, deductive thinking is the famous method of detective Sherlock Holmes, which allowed him to solve the most unbelievable and intricate crimes based only on facts. The application of Sherlock Holmes' methods in market analytics suggests some interesting parallels, but perhaps we will discuss this in a future article.