The most important tool …
What is a breakout?
Prices go through a Support (S) or Resistance (R).
What is its purpose?
Breakout = big momentum. Prices were contained by a S (or a R) for a certain period of time. When they can finally go through that virtual floor (or ceiling), the contained selling (or buying) pressure is finally let out. The combination of Bollinger bands and Breakouts is “explosive”.
How to use it?
We know the direction of potential trades - MACD “Cross-over” neatly done.
We identify potential volatility and thus trade - tight Bollinger band.
NOW: observe the price over various periods of time. Is there any obvious S (while MACD indicates a potential Sell) or R (potential Buy) over the last few days … or today … during the last hour …? Practice. Since we are trading on very small horizons here, the S and R will likely be observed over minutes rather than hours.
Whichever S or R makes more sense, draw an horizontal line to visualize better if and when prices go through it.
NB: Often, you may feel the temptation to proceed with a trade prior to a complete breakout. That’s one of the most common pitfalls. Timing is everything. Do not enter too early (it may look like a breakout is under way, only to see that it does not go through the S or R; a “fake”), nor should you enter too late. That is when Level II (and practice!) becomes an extremely useful complement.
I will be back soon.
Good trading to all,
Mark
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