1-2-3 trading pattern entries
In my last post we started looking at using technical analysis to identify 1-2-3 trading patterns in up trending and down trending markets.
In this post we are going to start reviewing how we might use these patterns to provide us with entry signals in a trading system that will allow us to trade profitably.
1-2-3 breakout trading system - first steps
Before I get started, I’d like to point out that this post is intended to get you thinking about how to incorporate 1-2-3 breakouts in a trading system of your own. There is far more to a trading system than simply identifying an entry signal, as you would know from reading our earlier posts.
At the very least you will also need to have a clear exit strategy and use effective money management before even thinking of placing a trade, not to mention the backtesting and paper trading you need to do as well.
In this post we are going to look at long entry signals in an up trending stock (or other market).
As mentioned before, stocks and markets tend to move in waves, and we can identify the direction a stock is trending by taking note of the peaks and troughs as they are formed. Successively higher peaks and troughs indicates an up trend.
Once we have identified the overall direction of the stock/market, we then need to identify a high probability entry.
One way to improve our chances of taking a successful entry is to wait until the stock has demonstrated that it has broken through resistance at a previous price point.
The previous peak in an up trend may be a point of resistance, as the price did not previously go higher than that level on the last attempt.
A breakout occurs when price has exceeded the ‘point 2′ (the previous peak), and it is at that point that an entry may be taken.
In a 1-2-3 breakout trading system, an entry is set 1 point or cent (depending what market we are trading) above the last peak.
It is not necessary to sit in front of a computer to wait for this to occur, because a conditional order can be placed to enter a trade with a broker to enter long if that entry price is reached any time during the trading session.
The initial technical stop for this system would be just below the point 3, as this is the most recent level of price support. There are of course other methods to place stops.
In the chart below, you’ll see that a number of 1-2-3 patterns have been identified, along with the corresponding entries.
With this system we are entering long just as the stock/market has made an up trending directional movement, eg, there must be a low (point 1), a high (point 2), then a higher low (point 3), followed by a higher high (the entry) in order to make a 1-2-3 breakout.
Take some time to review possible entries with this system and in the next post we’ll take a look at exits.
Happy Trading
Brian Dibbins
Trade Profitably © 2006 - 2007
31st July 2007
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