How do we trade this scenario: The day after NR7 is also a NR7 but make a low below first NR7's low?
Also I have seen that many times, after the NR7 day, the low next day goes below the NR7 day triggering a false sell, and then next day onwards the price starts shooting up!
Ex:
Day 0 : NR 7 setup detected
Day 1 : A low below day 0's low triggers SELL
Day 2: Price starts moving upwards violently!
Any guidelines on identifying a potentially false signal?
Bunny, We can never predict the direction of breakout. At times, breakout works and at other time, same setup fails. so rather then predicting and trying to be correct in our decision... we have to play the probability and adjust our trade management process.
In this post (post #18), I have mentioned about how to play the breakout.
http://www.traderji.com/technical-analysis/27956-scalping-strategies.html#post307876
This approach will be able to get you into the next reversal trade, after false breakout.
We can certainly monitor certain other factors to judge the strenght of breakout. (Though they are subjective but market is too complex to judge by set of rules always.. So I am happy with some amount
of subjectivity )
1) Price does not return to NR7 days range.. (depending on amount of penetration, we will be able to sense it.) You can watch for Pivot High/Low (PH / PL) level of NR7 day. If PHs are getting broken then the trade goes in
amber zone where we need to watch.
2) In perfect breakout, we should be able to see big range on next day.. which indicates expansion. If there is no expansion. then better watch out. Market is telling you something..so we better listen to it rather then closing our ears and eyes and predicting that we just caught the NR7 breakout and we can't go wrong.
3) Volume should support breakout.
4) The break should be able to break previous intraday PH/ PLs of NR7 day or the day before
5) Moving averages should start diverging and getting properly aligned to indicate the begining of next trend.
7) MACD / RSI / Stoch should start showing the clear picture.. (not sideway cris-cross pattern that confuses traders)
There may be more.. (but I think above 7 points are more then enough).
In my trading, I get into the breakout of NR7 range. and then add-on to the position as soon as confusion zone is crossed and we are about to enter the smooth sailing zone.
(it is like driving thru city traffic then to ring roads and then on to the highway..)
Happy Trading.