This post is going to expand on the ideas that I shared in a post last week on X. Here’s the link if you’d like to view that post: How to spot whether a breakout is failing or not
I’m going to share an example of a bearish breakout trade I took yesterday (04/15/2024).
In general, I’m not a fan of breakout trades that haven’t backtested or pulled back yet but this is one of those exceptions where I’m very interested.
The market started slowly churning higher for several 5 min bars after a strong move down about 4+ points above the 5150 level. This is basically just consolidating into the break except it’s angled slightly upwards.
These are typically solid breakout trades as the market has auctioned close to the breakout area in advance. If the market had traded down without auctioning first and then tested the level on decreasing strength then I wouldn’t trade the breakout.
For some context, the 5150 level is a major level that I had talked about last Thursday. I said that we want to watch for a break below on volume which would tell us that sellers are in control.
In the charts below, the left chart is a 5 min chart and the right chart is a 10 second chart. The indicator on the bottom is a custom study (Sierra Chart) that I use which essentially shows how strong the current auction is relative to recent auctions. So a strong red bar which is followed up with decent strength red bars (like we saw in the bearish breakout below) tells us that the market wants to auction lower.
When you see insane strength on a move like this at a major level there’s a good chance it’s not coming back up for the backtest. I felt pretty confident in less than a minute after this break that it was gone and not coming back.
I entered after about 4 or 5 bars below the break. It’s a major level that I’ve been watching and there’s heavy selling strength and good pacing on the DOM/tape, so I’m looking for the short but patient.
I try not to jump into trades right away. In hindsight, I could have been earlier into this trade but nothing is perfect in trading, so I was a bit late to join the move.
I like to trail my stop on trades like this as it’s working in my favor right away and there’s no reason to leave a large stop with this much strength and momentum on your side.
I like to get the stop to breakeven ASAP and then trail it behind pivots on the way down. Trailing behind pivots takes practice but in general I like to wait until a pivot leads to a break of recent highs/lows on the micro level before trailing otherwise it often pops back up a bit to flush out weak longs/shorts.
I hope you found value in this post. I’ll be sure to post more trade examples in the future.
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