When To Enter S+R Line Trades
Line breaks are the main types of entries I use. This style of trading is commonly called Breakout Trading. However, this breakout trading is a little different than most types of breakout trading. The main difference is that I like to use my brain when deciding to enter. I do not robotically enter the moment a line is broken. There are several factors that dictate whether or not I get into a trade, and if I get in to the trade, when I get in.
Candle Movement (momentum): This is probably the main factor in determining whether or not I will enter a trade. Some people have trouble understanding what momentum is so I will try to explain it as best I can. As far as I am concerned it is a simple concept. I believe the people that have trouble understanding momentum are overcomplicating things.
Momentum simply refers to the speed at which the candle is moving. If the candle is moving very fast (moving up/down a few pips at a time without stopping much or at all), then the candle has strong “momentum”. If, instead, the candle is pushing up 1 pip at a time, and every few pips it stalls and reverses slightly, then the candle has weak “momentum”.
So, if a candle with a lot of momentum crosses either a scalp line or an S+R line I will enter right away. I do so because the candle already has momentum and the line break is likely to give it more momentum as new traders jump in. If I hesitate at all it could move 20 or more pips before I manage to enter. If, instead, the candle has very little momentum, and it is slowly crawling its way up/down when it crosses my line, I will hesitate. I do so simply because I do not have much confidence in the strength of the move. My hope is that the break of the line will give it the momentum it requires to begin to move, but I want to see that momentum first. If as soon as it breaks the line it jumps up 3-5 pips I will probably enter. Sometimes you will find a line is broken by 2 pips and then it completely reverses. This is why I am wary of moves with slow momentum. As a trader, I am trying to protect myself from entering a break that is not really a break.
Determining momentum comes down to the “bulls” and “bears” I talked about before. A bullish candle with a lot of momentum shows that the bulls currently have a lot of power and the bears have very little power. Conversely, a bearish candle with a lot of momentum shows the bears have a lot of power and the bulls have very little. So, if I am looking to enter a Bullish trade and a candle with a lot of momentum crosses my line I know the bulls have power and I enter without hesitation. Again, using a bullish candle as an example; if the candle is crawling up 1 pip at a time and constantly stalling, it suggests that the bulls currently have more power. However it also suggests the bears are fighting the move and trying to pull the price down. So, if my line is crossed only slightly, I am concerned that the bears can use the barrier the S/R line provides, and gain the upper hand, thus reversing the momentum. It is essential to remember that every single pip movement represents a struggle between the bulls and bears. Candles are a tool that tell us who is winning that struggle at that moment, this is why it is important to be able to read candles.
Line Strength: Line strength is simple to gauge. If the last time the price approached a line the price got stuck in a range on the line I would be very cautious about trading that line again anytime soon. At best, I would consider the line a very a weak line, but more likely a completely invalid line. In the picture below, highlighted in red, you can see a range that is stuck on a line. A range like this severely weakens the line. There are two ways the line can recover. First, if price moves well away from the line (200+ pips), and stays away for about a week, I might consider trading the line again. This is because the line has had time to recover. However, I still consider the line risky because it has not displayed that it has regained is strength. I am only assuming it has. I will probably trade the line, but I will be very cautious in trading it. I might enter with a reduced position, stop loss or both.
Secondly, a much better way for a line to regain its strength is for the line to completely reject the price. If you look at the picture below you see a range stuck on the line (highlighted in red), and a strong reversal from the line (highlighted in blue). The bounce from the line immediately makes it tradable again. You should be looking for the same kind of ‘V’ or ‘U’ shape in order to identify a scalp line.
You should also take into consideration the strength of the bounce. If it is a very weak bounce, it is not significant. I want to see a strong move towards the line, a bounce, and a strong move away. There is no exact amount of pips I want it to move, it is a judgment call I make at that time.
Previous Breaks: Every time a line breaks in the same week it gets more and more likely that the next break of the same line will not make for a successful trade. So after the first break, the chance that the second will make for a good trade is less likely, and the third break is even less likely. I will sometimes take the second break of the same line in the same week. I rarely take the third break, and I never take the fourth. I also expect to see at the very least 6 candles, and a 100 pip move between breaks. If there is not 6 candles between the first and second break, or the break of the first did not move at least 150 pips from the line, I will not trade the second.
Taking a look at the chart above we have 4 breaks of the same line in the same week.
1. The first break was a normal S+R line break and I would have entered.
2. The second break had 6 candles in-between breaks and moved at least 100 pips ways so I would have taken it.
3. The third break moved at least 100 pips but we only have three candles between breaks so I would not have traded it.
4. The fourth break I would not have traded because I do not trade the fourth break.
Let’s imagine for a moment that the fourth break was only the second break. I still would not have traded it. Yes it did move 100 pips away, and there are at least 6 candles in-between breaks, but I would not have traded it because the 6 candles are too close to the line. I am looking for the candles to clear the line, stay around at least 100 pips away from it for at least 6 candles, and then come back.
Vicinity to S+R Zone: S+R zones are no trade zones for me. If the line is too close to the S+R zone I
will not trade the line break. The general rule is: If the normal target of the line break will take you into the S+R zone it is not tradable. So, if a scalp line is 50 pips or less from an S+R zone it is not tradable. If an S+R line is 70 pips or less away from an S+R zone it is not tradable.
S+R Line Targets
Picking Targets
Targets vary depending on the pair you are trading. You cannot have the same target on GBP/JPY that you have on EUR/USD, because EUR/USD moves only about ½ as much. A little trick I have learned is to figure out the average daily range (ADR) of the pair and divide it by 4. This gives you an idea on what you should target on a normal S+R line trade. You will probably need to tweak the target slightly over time, but dividing the ADR by 4 gives you a general idea. To save you time I have
figured out the ADR for you.
Targets vary depending on the pair you are trading. You cannot have the same target on GBP/JPY that you have on EUR/USD, because EUR/USD moves only about ½ as much. A little trick I have learned is to figure out the average daily range (ADR) of the pair and divide it by 4. This gives you an idea on what you should target on a normal S+R line trade. You will probably need to tweak the target slightly over time, but dividing the ADR by 4 gives you a general idea. To save you time I have
figured out the ADR for you.
GBP/JPY ADR = 281 pips
281 / 4 = 70
GBP/JPY S+R line target = 70 pips
GBP/USD ADR = 172 pips
172 / 4 = 43
GBP/USD S+R line target = 45 pips
I’m sure you get the idea. I will let you figure out the rest of the targets for yourself.
USD/CHF ADR = 111 pips
EUR/JPY ADR = 183 pips
USD/CAD ADR = 117 pips
AUD/USD ADR = 111 pips
EUR/USD ADR = 127 pips
These are all the ADR’s I have figured out. If you want to trade any other pairs you will have to figure it out for youself. Remember, I only trade GBP/JPY, so I cannot give you more accurate targets on other pairs. This is the best way to get a general idea. All you have to do now is tweak the target based on your observations.
Refining Targets
Once you have picked your target for a pair you apply it to your trades on that pair. If after some time you notice that the target is often not hit you lessen it. So for example above with GBP/USD we figure out based on the ADR being divided by 4 that we should target 45 pips. If when using that target you notice it is often not reached you simply lessen the target to 40 or 35 pips. If instead your target is hit and it often moves beyond it you could increase your target to 50 or 55 pips.
Keep in mind that this usually takes months of observations I do not change targets based on two or
three trades. My targets on GBP/JPY have been refined by 3 years of data.
How To Trade S+R Lines
Depending on your account size and weekly goals you can trade S+R lines a few different ways.
Close Full Position At Target: The simplest way to handle the trade is to set a target of 70 pips and close out the full position once the target is reached. The 70 pip target is always 70 pips from the S+R line not from your entry. So for example if you have a S+R line on GBP/JPY at 218.00 and you are entering a long break you target 218.70. As soon as you see the candle reach the 218.70 point on your chart you close. If you enter a short at 215.00 your exit target would be 214.30. As soon as the candle hits 214.30 on the chart you exit. This is by far the easiest way to trade S+R line breaks.
Lock In And Target More: When you first enter you target 70 pips from the line just like the method above. When your target is reached you only close out half your position. You then move your stop loss to break even and try to target more with the second half. If it reverses and your stop is hit you will be stopped out at break even and lose nothing on the second half. You will have gained 70 pips on the first half of you position and 0 on the second half. If however the second half continues to move in the direction of the break that second half can make you 100-200 pips or maybe even more.
Personally I use the second method but I am beginning to phase it out. Closing the position with 70 pips is much easier and safer. After adding up the numbers it seems that the ‘lock in and target more’ way of handling trades makes about the same amount of pips as the easier ‘close full position at target’. So there really is no advantage to only closing out half and trying to target more with the second half.
When To Enter Scalp Line Breaks
Scalp lines are much simpler to enter. However it is still not just a case of entering instantly on a line
break. You should still take momentum into account in much the same way you would for a S+R line
break. Beyond this there isn’t much to write about entering a scalp line trade. All it takes is a little practice, just keep candle momentum in mind.
break. You should still take momentum into account in much the same way you would for a S+R line
break. Beyond this there isn’t much to write about entering a scalp line trade. All it takes is a little practice, just keep candle momentum in mind.
Picking Scalp Targets
You can also use a simple equation to pick your scalp line targets. Everything is pretty much the same except for scalps you divide by 5. Again you will probably need to tweak the target slightly over time, but dividing the ADR by 4 gives you a good starting point. Here is an example:
GBP/JPY ADR = 281 pips
281 / 5 = 56.2
GBP/JPY SCALP line target = 55 pips
In reality I use a 50 pip target for my GBP/JPY scalps but this gets you very close. I have tried it on 10 different pairs now and every time it has given me a good target to start with.
How Long Do Scalp Lines Last
I would not want a normal scalp line on my chart for any longer than 1 month. If it is a very strong scalp line I may keep it on my chart for up to 2 months. A strong scalp has to have rejected a major trend or even possibly a medium strength trande but had two or more bounces. 90% of scalp lines would not be left on my chart longer than 1 month if they are not broken. If a scalp line is broken it should be removed immediatley. I only ever use a single scalp line one time and them I remove it.
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