Monday, July 18, 2011

Trendline breaks

Trendline breaks, especially of trends longer than 20 bars or so should be carefully evaluated for continuation, reversal or trading range action.

A strong trendline break will go many points and many bars beyond the trendline, often closing above the ema in one leg. If this break occurs after a strong overshoot and reversal bar, its a very strong trendline break and reversal is likely. Any 2 legged pullback or any reasonable 1 legged pullback such as 1chbo should be taken.

A weak trendline break that occurs after a very large trend bar or a taily bar is likely to turn into a trading range. This is especially true if the terrible signal bar is followed by a 2 legged pullback to the ema that comes close to the extreme of the trend and fails to take it out or takes it out only by a few ticks and then reverses.

In between the two is a moderate break that gives a channel either in the same direction or the opposite direction of the original trend such as the one today. The break came off a 2 legged move (b30-34), after a doji bar and no real overshoot. However, the A2 that followed (b38) did not go far and started to move in a channel. Once you assess its a channel, you should trade it like a weak trend, buying 2 legged pullbacks to the trendline and ema and scalping most entries by exiting at the trend channel line.


  1. Hi cad,

    Would a S below b15 be a good trade? I looked at as a 2LPB. There is some overlap from b8-b15

    Also would a S below b24 be a good trade? I see FBO of a TTR from B19-23 and 1st touch of EMA.(it touched on my charts.)

    I didn't take these trades and yes they worked today, but wonder if they are high probability trades.

  2. I normally like to short below bear bars so b16 and b25 are better signals. They are both 2 legged pullbacks but b16 is overlapped with large bars and I usually avoid them. b25 is better, since it touched ema and poked above trendline. You can also short the close of b24 on limit.