Four Major Opportunities to Build a Position
After thorough analysis and research of the market, determining the timing for entering the market, especially right before significant market opportunities are about to trigger, is the core essence for speculators.
The choice of when to enter the market is based on candlestick charts, minute charts, and intraday charts. The accuracy of choosing the entry and exit points is crucial to the success or failure of a trade and is equally critical to the trader's mindset.
01 Entering the Market on Breakout Signals
Logically speaking, market fluctuations depend on the balance of power between buyers and sellers. When prices break through the highest point of the previous day, week, or month, anyone who went short at any price during these periods is caught in a trap without exception, and a portion of them will inevitably accept their losses and exit, which in turn boosts the upward trend; conversely, when the price falls below the lowest price of the previous day, week, or month, everyone who went long at any point during these periods will see floating losses, and a certain portion will have to cut their losses, exacerbating the downward trend. Therefore, studying breakouts is both essential and necessary.
Based on their practical importance, breakouts can be roughly divided into seven types:
Breakouts from large patterns, major moving averages, trends, consolidation, new highs or lows, large volumes, and minor cycle signals.
The main analysis of the authenticity of breakout signals covers the following four points:
A. Principle of Average Price Breakout. Since many false moves can occur in the market, especially towards the close, sudden sharp rises or deep falls in the last few minutes can distort the candlestick charts. What holds analytical significance is the moving average line that represents changes in market costs. The daily average is essential to watch, with only the breakouts of the average price holding real significance.
B. The Extent of the Breakout. After a breakout occurs, the larger the distance from the breakout point, the higher the authenticity and effectiveness of the breakout. It is observed that if the average price moves more than 1% away from the breakout point, the breakout is considered valid and effective. Otherwise, its probability decreases.
C: Duration of the Breakout. Once a breakout occurs, the closing price and the average price during trading must stay in the direction of the breakout trend for three consecutive days to be deemed effective; and the longer it remains, the more effective the breakout becomes.
D. Trading Volume and Open Interest. Generally, a breakout requires a significant volume of trades. A relatively smaller volume means fewer trend adherents and panickers, increasing the possibility of a false breakout. When a breakout occurs, it's not necessary for open interest to increase; most breakouts caused by a decrease in open interest are due to opposite panic selling. However, if open interest does not increase following the trend's continuation, the development of the breakout trend will be significantly diminished.
Below, we'll specifically discuss entering the market on new highs or lows and trend line breakouts.
1. New Highs or Lows Breakout
New highs and lows come in two types: one that surpasses a historical resistance or support level to reach a new high or low;
The other is when the price movement has crossed the historical highest or lowest price, hence setting a new historical high or low.
The authenticity of a breakout remains an ever-present dilemma for futures speculators. There are three choices of strategy for entering the market on breakout signals: anticipation, following, and confirmation.
Entering the market in anticipation can secure a favorable position cost, but one must endure the pain and potentially large stop-loss costs of market manipulation before the breakout. Following entry improves capital utilization and reduces stop-loss costs, offering a relatively higher chance of success, but with a certain loss of profit margin and the risk of being caught in a failed breakout after a pullback.
Confirmation entry refers to the strategy of following the direction of the breakout after a pullback has confirmed the breakout's validity. Although this strategy comes with a reduced profit margin, it minimizes stop-loss costs and maximizes profits over time.
Moreover, the greatest risk with the confirmation follow-up strategy is that some significant breakouts may occur without a pullback, or the pullback happens at a much later stage, posing the risk of missing out for speculators and the risk of being shaken out after entering the market when a pullback does occur. A preferable solution in a reliably confirmed larger trend is to adopt a phased position-building approach. Opening a small position before the breakout, increasing it during the breakout, and aggressively following up upon confirmation.
2. Trend Line Breakout
A trend line breakout is the most valuable early signal for entering or exiting the market. Entering the market near the trend line, using the trend line as a stop loss or following on a breakout, this method must consider other technical signals and cycle periods, particularly the frequency of touches to the trend line and chart pattern waves.
(1)General Application of Trend Lines
A trend line connects the low points to low points or high points to high points of fluctuating market prices, forming a straight line. There are upward trend lines, downward trend lines, and oscillating trend lines. Upward trend lines are divided into upward pressure lines and upward support lines. If the market's development shows progressively higher highs and lows, connecting the highs forms an upward pressure line, while connecting the lows forms an upward support line. The trading strategy for an upward trend line is:
First, in a fluctuating market, when the market is in an upward trend, and prices fall to the upward support line, one can enter long positions and use the break below the trend line as the stop-loss point for long positions.
Second, in a fluctuating market, when the market is in an upward trend, and prices rise to the upward pressure line, one can close long positions without making sell trades, waiting for another buy opportunity.
Downward trend lines are divided into downward pressure lines and downward support lines. If the market develops with progressively lower highs and lows, connecting the highs forms a downward pressure line, while connecting the lows forms a downward support line. The trading strategy for a downward trend line is:
First, in a market fluctuation, when the market is in a downward trend, and prices rebound to the downward pressure line, one can enter short positions and use the break above the downward trend line as the stop-loss point for short positions.
Second, in a market fluctuation, when the market is in a downward trend, and prices fall to the downward support line, one can close short positions without making buy trades, waiting for another sell opportunity.
Oscillating trend lines are divided into oscillating pressure lines and oscillating support lines. In oscillating markets, connecting the high points forms an oscillating pressure line, while connecting the low points forms an oscillating support line. The trading strategy for an oscillating trend line is:
First, in an oscillating market, when prices fall to the oscillating support line, if holding short positions, then close short positions and enter long positions, using the break below the oscillating support line as the stop-loss point for long positions.
Second, in an oscillating market, when prices rise to the oscillating pressure line, one can close long positions and enter short positions, using the break above the oscillating pressure line as the stop-loss point for short positions.
(2)Issues to Consider in Applying Trend Lines
Trend Line Time Periods
Trends can be classified into long-term, medium-term, and short-term based on the duration. Generally, trends formed on daily charts are defined as short-term trends, those on weekly charts as medium-term trends, and those on monthly charts as long-term trends.
According to these three types of trends, trading styles are divided into short-term trading, medium-term trading, and long-term trading. Every trader should choose their trading style according to their trading characteristics, thus determining the appropriate trend period. In trend analysis, investors should analyze the market in the sequence of long-term, medium-term, and short-term.
Analyzing short-term markets after confirming the medium to long-term trends will result in higher accuracy. Long-term trends, spanning several months or even years, are not suitable for general investors; hence, investors should focus their analysis on medium and short-term trends.
Interchangeability between Trend Lines
In the trend line, pressure lines and support lines are not immutable; once the price breaks through a pressure line, that line may become a future trend's support line, and when the price falls below a support line, that line may become a future trend's pressure line. Investors should be flexible in applying pressure and support lines when using trend lines.
Effectiveness of Trend Lines
There is much debate on how to select the high and low points when drawing trend lines; some choose the highest or lowest price of the day (or week, month), and others choose closing prices, among others.
The real significance of a trend line is to indicate the direction of market development. A good trend line should cover more than 80% of market movements. Therefore, the more points a trend line connects, the higher its accuracy. Investors can verify this repeatedly with a wealth of candlestick charts to find the trend line that most closely follows the direction of market development.
02 Entering the Market at Support and Resistance Levels (Oscillation Box Trading)
Pressure and support generally appear at key locations like previous high and low points, whole numbers, important moving averages, etc. Additionally, high transaction areas are also important support and resistance levels, and their changes should be monitored.
The dense area on the chart acts as a buffer zone that prevents price movements from rising or falling. When a futures analyst mentions good technical support at a certain price level, he is usually referring to a dense area on the chart, indicating that the commodity has maintained a relatively stable price level over an extended period without significant changes. Once this dense area is effectively broken through, the price might significantly rise or fall. The longer the duration of the dense area, the more dramatic the speed and magnitude of the rise or fall after a breakout.
Furthermore, previous high and low points are also considered. Generally, traders think about making buy or sell operations when the price breaks through the previous day's high or low, or when prices breach the previous week’s highs and lows. This is also an active use of pressure and support. Among them, buying before breaking the previous day's high and selling before breaking the previous day's low represents a short-term trading mentality, whereas the determining factor for medium-term traders or traders who rely only on charts is every week's high and low points.
When choosing entry or exit points or price levels, the repetitive impact of support and resistance levels is an effective chart tool. The breaching of support or resistance levels may form an important signal for opening new positions. Stop losses are generally set in a direction opposite to that of the breakout, maintaining a reasonable price difference from the support or resistance levels.
03 Entering the Market on Percentage Retracements
In a trending market, there are typically four major types of retracement levels: 38.2%, 50%, 61.8%, and 100%. Generally, the smaller the retracement, the stronger the comeback to the trend. A 100% retracement might indicate a reversal after bouncing back, as shown below:
In the price movement trend, retracements of 38.2%-61.8% opposite to the previous trend direction offer ideal opportunities for opening or adding positions. Percentage retracement trading strategy, being a relative indicator, can be applied to any time frame, whether monthly, weekly, or even minute candlestick charts.
04 Entering the Market on Gaps
Gaps, also known as openings, occur due to opening the market too high or too low. There are three types of gaps: breakout gaps, continuation gaps, and exhaustion gaps. A breakout gap is the first gap after the market selects a direction, holding significant guidance and serving as strong support or resistance for future market trends. The continuation gap, also called the measuring gap, usually appears when the price moves into the next whole area after a breakout, accelerating the rise or fall of the price, indicating that the price trend maintains the original direction.
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