How to trade Rejections and Failures

hi all i am starting this new thread on how to trade Rejections and Failures. firstly I am compiling thoughts put by other members of the forum in other thread relating to the Rejections and Failures.and also looking forward for the contribution from the seniors and other members of the forum.

Rejections and failures of price breakouts are very important for alert traders as these set up very good trading opportunities in the opposite direction. So it pays to keep an eye on such breakout 'breakdown failures particularly if they come after sustained move earlier and when the market is near important support/ resistance levels.

Catching these reversals is extremely profitable as the traders trapped because of failed breakout/breakdown come to our help when they get out of their loosing positions in desparation and thereby lending us a helpful hand.....

Posted above is a Nifty Futures 5 min chart showing 3 breakout failures and 1 breakdown failure in last 2-3 days ,marked on the chart. These have caught the swing reversal points with great precision, and hence it pays to listen when the failures speak loud and clear.....and these are the kind of failures which will make alert traders successful ....

Smart_trade
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While amateurs go broke by taking large losses,professionals go broke by taking small profits...... William Eckhardt in New Market Wizards

After long posting in TJ.
First of all a big thanks to ST Da…. Learnt all the basics from his posts, chats & interactions…a big gratitude for all his support & effort.
Here , putting the different perspective based on Al Brook’s way of trading price action. As we all aware market is controlled by institutions & most of their trading either based on some algo.,or HFT, or whatever name we give…. & their entries & exits are always based on some calculations or any model they follow…with minimal human interference.

Now on 14th we have strong b/o , a parabolic move , a strong move so we can expect the test of its high. Also the move was parabolic we should expect deep correction & we have deep correction on 16th in channel & price all the way came & tested the breakout point at B…a breakout test, to see still buyers around…so on 17th it got strong buying from open and it made strong spike from point C-D, then we have test of 14th High, & tries to break couple of time …or can say it made double top, but after forming double top, it went is tight trading range…not breaking down…means price was accepting that top & this was obvious by 12.05 bar on 17th after breaking down it turn into reversal bar, this means we can expect at least the Measured move based on spike C-D, i.e. the open or Low of first bar 5383-5385…till the close of 9.30 bar i.e. 5402, approx.. 20 point market topped at 12.30 bar at 5423…so ideal place to exit or book maximum profit. Then we had strong spike till 12.50 & it’s Measured move target was till Low of first bar, but this time it was overwhelmed by strong bear, so next target we can expect from Low or open of first bar till HOD, or minimum close of high, so if we deduct from the close of 12.30 bar i.e .5419 till the open of first bar, 5385(lowest target) i.e. 34 point…and day’s low was around 5351…approx.. 34 point & it was also major trend channel line overshoot…so we have two major point for correction for at least 2 leg…and that we get first leg spike from 13.55 bar till 2 PM, bar followed by second leg based on first leg measured move target that we got on 14.25 bar.
What I observe specially in BNF & NIFTY most of the moves are based on math only….& majority of time price reacts on these calculations, either by undershooting or overshooting by few points….so many a time it looks like the price all the way came & eat the stop loss, but in reality it is just the math.

Originally Posted by pav
Dear STsir,
what is difference between Rejections and Failures ?

Regards
Price breaks out above a Pivot High , closes above it and in next few bars, the price is unable to hold above the pivot high and closes below it .....that is Rejection.

Price breaks out above a Pivot High , and the same bar is unable to close above the pivot high and sells off and closes below the pivot high ....that is Failure.

So yesterday's price action was a Rejection of pivot high breakout as the market closed above the pivot high and in subsequent bars there was rejection of pivot high breakout. On 16th Aug 2012 both examples are of breakout and breakdown Failures .....

Smart_trade
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While amateurs go broke by taking large losses,professionals go broke by taking small profits...... William Eckhardt in New Market Wizards

reserved..

Originally Posted by murthyavr
Dear ST,

How to trade the rejection or a failure?

After such rejection/failure to break above, few possibilities are there.

1. Price may come down a little and may make a second attempt to break-out

2. Price may consolidate along that level for some time, all the while making
attempts to break out of that level.

3. After the failure, price may come vertically down without waiting.

So, is there a safe way of entering into a successful trade, without falling into
the trap of consolidation? Do we have any other confirming indicators like
volume or stoch etc?
Murthy,

What the market does after the breakout/breakdown is important for trading it. I find following 4 scenarios to be common, I am taking example of the Pivot High breakout :

1) After the breakout the bar closes strongly above the pivot high.....and in subsequent bars continue going up.....this is is clear successful breakout....trade from the long side.

2) After the breakout , the bar closes strong and then the market goes a bit sideways, and continues in the direction of the breakout without closing in the range / below the body high of the Pivot high it broke....then again the breakout is successful...trade from long side.

3) After the breakout the bar closes above the Pivot High...and the next 1-2 bars show that the market is struggling to go up....it makes doji, small bars, long upper tail inverted hammers.....but still closing above the body high of the pivot it broke......then market is unable to go up and the bears get into the action. The bar closes below the body high....short the low of that bar. Your stoploss should be at the swing high......or if trading too aggressively, the high of the bar which closed below the body high.

4) The breakout bar unable to hold and the price retracts and closes below
the body high of the pivot bar......it is failure and short the low of this bar with stoploss at swing or new pivot high.

This gives early entry in the reversal move with small stoploss giving a very good Reward to Risk ratio.

Hope that the above helps....

Smart_trade
__________________
While amateurs go broke by taking large losses,professionals go broke by taking small profits...... William Eckhardt in New Market Wizards

Originally Posted by balasoft80
Dear ST,
Could you please throw some light on to identify valid breakout? For example a bar is breaking pivot high or consolidation. Now how should I enter into the trade? Above the pivot high or consolidation? Or I have to wait to see how that breakout bar and subsequent are reacting and enter the high of the breakout bar? Thank you

Bala
Dear Bala,

Every breakout is considered to be a valid breakout unless it proves otherwise. So on breakout, you have to trade in the direction of the breakout and buy above the pivot high or high of consolidation. The market generally moves very fast after the breakout, so if you wait for bar to close above the pivot high then your entry will be away from your stoploss.....and even after closing above the pivot high,the breakout can fail as it does in rejection.

But if the market is breaking out above the pivot high which is at previous resistance level, it has failed on earlier occasions or the market has travelled a lot of distance from its recent low as it comes to break the pivot high...then it is better to wait for bar to close above and make a sideways base above the pivot high .....and then we buy.

Smart_trade
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The below is the case which i was talking about yesterday. Could you please let us know how to deal with below scenarios? Thanks
Bala,

First breakout marked on extreme left I will not take because average line is still sloping down...so I need more confirmation of valid breakout. So I will wait for close above the breakout level which we never got.The market needs some basing action here before a valid breakout comes.

Second breakout I will take and quickly reverse on rejection.A loosing trade here and then reversal.

Third breakout I will not take because of failure two times earlier and look at the distance it travelled for coming to breakout point.....it already has spent all its bullish energy, in fact here I will be on look out for a rejection or a failure and take a short trade once the failure is confirmed.

But all the above is hindsight analysis...in actual trades I might act differently...but one thing is definate that we have to reverse the position on failure and ride the reverse move.So even assuming that you take all the long trades and then reverse on failure...you still make plenty of money in all the three failed breakouts

Hope the above helps...

Smart_trade

look at the distance it travelled for coming to breakout point.....it already has spent all its bullish energy

Smart,
Can u pl elaborate on the Bolded.
I have seen some people trading with this Distance strategy,esp for positional,but i an unable to follow clearly as usual.
Good breakouts are the ones where the market goes sideways just below the breakout, consolidates and breaks out with force and then never looks back.

As against that if the market coming from long distance to the breakout point without sideways consolidation are suspect breakouts more likely to fail as market spends its bullish energy for travelling till the breakout point and after the breakout it has no energy left to carry the breakout through.

Smart_trade

Quote:
Originally Posted by VIKAS 21
Dear ST Sir

Nice explanation for three failed breakouts,could you please also give some insight how to take profit from these three failed breakouts.if we short below the body low of these breakout bars at which points we have to exit.because it reversed very quickly as we entered the trade.i mean the point of profit booking in all these three failed breakout trades.
Profit taking is an art....look to take profits near previous supports/resistances, look for hammers, intertwining bars,virtual high/low patterns for booking profits.

Smart_trade
__________________
While amateurs go broke by taking large losses,professionals go broke by taking small profits...... William Eckhardt in New Market Wizards