Today I’d like to run through a quick tutorial that will enable you to get into trades faster, for better profits.
Waiting around for confirmation of a trading signal is a big frustration for traders.
Act too fast, and you’ve jumped into a trade on dodgy information, where your signal wasn’t strong enough and could have been false.
Act too slow, and you’ve missed the move – the market has gone without you, making money for a lot of other traders!
So, how long should we wait?
I expect you’ve been in this situation – you’re watching the market nudge up to a key level – will it break through? Or will it bounce back?
Perhaps you’ve had a candlewick breaking through …
Is it a breakout?
Should I wait for a candlestick to close on the breakout side of the line?
Should I wait for a second candlestick for confirmation?
Each trader will have their own personal criteria for confirming a breakout, so I’ll take a look at a few here that don’t require any extra indicators:
A close above: A candlestick closing through the line of support or resistance – sounds a little risky.
An entire candle above: We could wait for a second candlestick to confirm this move.
- Waiting for a pullback: A close on the other side, then a retracement back to the line, then a close beyond the first close. Retesting the trend line from the other direction is a great test that it’s turned from resistance into support, or vice versa. If you wait for this kind of confirmation, it doesn’t happen so often, but when it does it’s very strong – and you can get a good entry level because the price has retraced (Check here link for more info on trading pullbacks and throwbacks).
- Candle size: Momentum, indicated by bigger candles as you approach the breach of the trend line. The problem here is that we often have consolidation around trend lines – when we don’t, and the price charges through on big candles, then we’re likely to have missed a good proportion of the move if we’re waiting for a big candlestick.
All of these are good ways to confirm a breakout, but they all come with the frustration of waiting and of potentially missing a part of the all-important move that we want to catch.
That’s why I’d like to show you another method used by traders who want an immediate yes/no answer on a breakout.
Test of strength
If you read Market Maven regularly, you’ll know that I really don’t hold much faith in RSI overbought and oversold readings.
You don’t have to look far to find that an “oversold” readings (i.e. the RSI reading below 30) is no indicator that the market doesn’t have a long way further to fall.
Instead, we’ll use the RSI indicator in a different way.
If we’re looking for a breakout, we’ll expect that breakout to come with a degree of momentum. If the price is just going to poke its head above a trendline, before scurrying back – that’s not enough. We want to see a solid move – but we don’t want to wait for confirmation of it in the candlesticks.
Therefore, I’ll use the RSI indicator to find that momentum – RSI measures speed of a move… so if that speed is increasing… momentum will be building…
I’m talking about RSI convergences.
On this chart, each time the price touches the line of resistance, the RSI reading is higher, which indicates that momentum is building – and that the line is likely to be breached.
So, if the price is moving up through our trend line, I’ll want the RSI indicator so be showing higher highs, signaling building momentum.
This kind of RSI reading tells us that traders have their foot on the pedal and can drive this price higher.
And conversely, if the price is moving down through a trend line, then I’ll be looking for lower lows on the RSI.
This is a good tool for getting faster confirmation of breakouts, so you’re not hanging around watching your entry price get worse and worse, while waiting for a signal to enter the market.