Price Action: How to trade breakdown levels?

 

Hello, friends! Today we will talk about how to trade profitably on breakdowns of support/resistance levels. As we know, most Price Action setups are aimed at trading from the levels. So, in fact, we are working with rebounds from the levels.

Can we make money on breakdowns? After all, they are also a tidbit for a trader. You can work with level breakdowns, but you need to know the correct tactics and pitfalls. Read the article below and find out all the secrets of working with levels!

How to trade level breakdowns on Forex

To begin with, it’s not easy to trade breakouts, unlike the levels bounces, as is the case with most Price Action setups. And I want to immediately warn you that if you are still a beginner, if you are trading relatively recently, then it’s better to trade only rebounds from the levels. Breakdowns of levels to trade do not try.

And only when you gain experience, when you start feeling confident in trading the level rebounds, you can slowly begin to take some breakdowns. Since in general, it is harder to work with breakdowns, the percentage of profitable trades is less than in the case of rebounds from levels. Therefore, it is better not to try them if you don’t have much experience.

Let’s start with the classic model used in the breakdown of levels, which can be found in most sources. Imagine that we have a certain level and we expect that there will be its breakdown:

What are we doing? Suppose, we expect that there will be a breakdown upward, that is, we will need to purchase accordingly. In the classical approach, it is recommended to place a pending order just above the level and wait until the price activates it.

The logic is that in case of breakdown of the level, we will immediately enter into a deal. Let’s say the level was broken through like this:

Later the prices will start growing. There will be upward candles and we will be in the profitable zone:

It would seem that everything is fine. But, often this tactic is not the most successful nor the most effective. I would not recommend it.

Why? Because very often there are situations when you put a pending order above the level. The price grows, breaks through its upper shadow level, and activates your pending order to buy:

Then the next thing happens: the price falls and goes lower and lower. As the result your stop loss works out:

There is another approach that is not so common, but still applicable. Imagine that there is some level. We expect that there will be a breakdown, but we do not set a pending order, just waiting for this breakdown to happen.

Breakdown occurs, the level is broken by a candle with a tail:

Then a pending order is placed just above the high point of the candle that made this breakdown:

What is the logic here? If the price now reverses and goes down, then we will not be in the transaction and lose nothing. This approach is generally more effective than simply placing pending orders. But it also has its drawbacks.

Imagine that we have a candle that broke through the level. We put the pending order just above its high point to buy:

Then some small candle is drawn, which activates our order with its shadow and sharply goes down:

Such things happen. And, they happen very often. Nevertheless, in tactics, when we expose a pending order above the high candle that carried out the breakdown, it is possible to work. Such tactics have the right to be. I’m using a little bit different tactics and now I’ll tell you about it.

Let’s imagine that we have a level. In addition to the moment of the breakdown itself, we must look at the candles with the help of which there was a breakdown. In order to trade the breakdowns, we need a large candle. Characterizing that the market makes great efforts, in order to go above the level.

We look, what candle is drawn approaching the level. It should be large relative to previous candles, that is, exceeding the average candle on the chart by half or at least one and a half. The candle should be solid. Not the Doji, and not the Pin bar.

If the candle is solid and it closes above the level, then we are waiting for another candle, which will be fixed above the level. Which will give us the justification that the breakdown really took place and we were entrenched above the level.

In this case, the candle should be small, and most importantly its closing point should not be below the level:

The candle after the breakdown below the level does not suit us. After the breakdown, we need a candle, which is fixed above the level (in the case of purchases), and at the same time, its closing point will be above the level.

Further, if such a situation occurs, then we place our deferred purchase order close to the level. If the candle closing point, which gave us confirmation, which was fixed above the level, is close to the level, then you can enter the market. If the candle is far from the level:

Then we put a buy limit order closer to the level. Not right near it, but close to it:

In the picture, you can see this pending order. I marked it as Buy Limit. Stop loss will be small. It is very important to watch that the stops are small, and the take profit is large.

When the stop loss is small, then set it behind the level. If the candle, which we have served as confirmation, has a small tail behind the level, then we try to put a stop loss behind this tail. Just under it.

Now we were considering buying. For sales, everything is the opposite. Take profit, the goal, as usual, is the next level. If there is no benchmark in the form of a level, then we multiply the stop loss by three or at least two. And, expose the take profit according to this.

Imagine that the stop loss was 15 points. Multiply it by 3 and we get that the take profit will be 45 points. We expose it from the entry point. That’s the way I trade the breakdown levels.

Next, you need to pay attention to the breakdown candle itself. Because very often there are cases when the point of closing the candle is below the level and punches it only with its shadow:

After such a candle, we do not consider it a pier. And, we do not get into deals. If a large candle rests against the level but closed below it, then, as a rule, we should expect a rollback. And, if a large candle broke the level and the point of its closure is beyond this level, then we are waiting for a candle that will confirm this to us, a candle that will be fixed above the level. The closing point of the second candle should also be above the level. Then we try to get into a deal near the level with a small stop loss.

Someone may say: “Well, we put BuyLimit near the level, but the price might run away without returning to the level. Accordingly, we will not enter into a deal”:

There is absolutely no problem about this. One of our goals when trading on price action is to open deals with small stops. We do not want to enter the market at any price. We aspire to enter the market with a small stop loss. Not to let the situation of not triggering demotivate us, we just do not pay attention to it. Take profit would cover the stop loss at least three times. Therefore, if you cannot enter with a small stop loss, then let it be. We should not care.

There is another tactic that I want to tell you about. It also applies to level breakdowns, but with some changes regarding my technique, which I mentioned above.

We also expect a breakdown of the level by a solid candle exceeding the average candle twice and wait for a candle, which will confirm this breakdown. That is, its closing point will be just above the level. Next, we put the pending order closer to the level. We put the stop loss in the same way as I told you above. At the same time, we put a sale order just one point below our stop loss.

That is, if our buy order works, but the price reverses and goes below the level, and our stop loss works, then we automatically consider this situation as a false breakout and enter sales.

This technique is interesting, but I personally do not apply it. Since in general, I do not like to turn over the position right away. It’s easier for me to wait until the situation on the market clears up and there will be some specific setups. However, this tactic has the right to exist, and I know that many people apply it.

Let’s now look at some examples on real charts to consolidate the theory. In theory, we considered examples of purchases, so let’s take an example of sales.

Above is the USD/CAD chart

Pay attention to the marked level. We had a large candle. More than the average candle for this chart:

The closing point was below the level. We have fixed this for ourselves, paid attention and are waiting for what will happen next:

Then, we have the Doji candle. But, we are only interested in the fact that it fixed below the level, and its closing point is below the level too. What does this mean? The price tried to go up, but it was not allowed to do so, thus it remained below the level at the end of the day. This means that the breakdown of the level was successful. And it was confirmed. Now, we can enter the market.

Since here the closing point was close to the level, it was possible to simply enter the market. The stop loss is slightly above the level since the tail of the second candle is still too large and for it, we would not have set our stop loss. Although, if possible, it is worth doing it, if the tail is not too big.

In this case, we just put a stop loss. It amounted to approximately 22 points:

There were no reference points for take profit, or rather they were, but very far. The closest level could clearly be seen at that time on the chart below:

It is clear that such goals are too big for us. Therefore, we simply multiply our stop loss by 3:

In this case, it was 22 points. So multiply it by 3 and get 66 points:

As we see, the price has passed this distance. Our take profit would have been approximately the same as the tick mark:

It would have been safely taken. This is how the breakdown of levels in the sales case should be traded. On the same chart, we can see one more example. Namely, in the next period, there is a correction to the top and again the price went beyond the level above:

Then, there was a breakdown with a large solid candle:

Then the price is fixed below the level. The closing point of the second candle is below the level. Thus, we receive confirmation. It would not be desirable to enter the market. Therefore, we would set the stop loss approximately closer to the level:

We would not have been able to see the third candle at this stage, so we would have put the stop loss just above the level, somewhere around here:

Our pending order for sale was activated near the level. The price was moving near the level for a while, and then there was a movement down:

It can be seen that 3 stop losses were taken. Let’s check this. Our stop loss was about 34 points:

The price went down by 150, so we would take three stop losses in any case.

Finally, let’s consider an example of a purchase:

The chart shows the level. Among other things, the level is formed by the gap. Gaps, as we remember, form levels. Here, this candle attracts attention:

It broke through the level. After this happened, we do not enter. We are waiting for the second candle, which closed above the level and showed that the breakdown really took place, and it is not false:

We could enter here on the market, but could also put the pending order closer to the level. In any case, I think it’s obvious that our pending order would be activated. Stop loss would be as usual just below the level:

Accordingly, the price continued to grow.

Another important point about which I always say is trading exclusively in the trend. Especially it concerns breakdowns. Since trading breakdowns against the trend are very, very ungrateful occupation. The percentage of profitable trades is small. Therefore, there is no sense to trade against the trend of a breakdown of the level. We trade only on the trend. And, in no other way.

Take care, Michael

ForexTraderPortal.com