How To Trade Break Out Formations
This is going to be a bit of quickie as I find myself short on time ahead of the opening bell. But if you have been around the block a few times then you know that quickies can be quite fun. And we both you know you’re easy!
Today’s formation on the E-Mini is a great study piece as it paints a textbook break out formation which often can successfully be leveraged as an entry opportunity. For some reason however many retail ratlings seem to repeatedly be missing out as they are unsure as to where exactly to enter. Let’s set the stage:
Quite frankly this is as textbook as it comes. Clearly what we have here is a touch of the lower 25-day SMA, which at first sight looked like weak technical context and thus was not suggested as an entry opportunity by yours truly earlier this week. Nevertheless I’m already positioned long since Monday after a speculative entry signal courtesy of the Zero indicator (you ARE a sub right? If not read this).
As a sidenote, since then I have received several inquiries as to whether it is too late to go long here and/or if I am still holding my position. Answers: NO, and YES – so rejoice!
Now I can already hear your little rodent brain rattling. “Is this a good entry opportunity?”, “Is it too late to enter?”, “Do I wait for a retest lower?”, “Do I wait for a breach of the recent spike high?”.
And here are the respective short answers: YES, NO, YES, YES.
I can understand how this may be confusing to you and I promise I’ll explain this in exhausting detail below – in the subscriber section. Sorry I cannot give it all away for free as the lair doesn’t run itself and those damn sharks in our moat need a new set of laser beams.
Now if that ticks you off then this will most likely push you over the edge. Here’s an update on our copper entry from last Tuesday. And yes it was (drum rolls) posted to the subscriber only section. Well we were hoping for a drop toward 2.62 and actually snagged it – just barely. By the way as a rule if you’re not being filled after a quick spike below your threshold then it’s usually okay to chase it up a few ticks. Yes, it may come back down and you missed a better fill but often you wind up missing out on a good campaign, especially on thinner contracts like HG. For me entry thresholds are ranges – not exact price points.
Anyway, let’s advance our trailing stop to < 2.653 – be generous – you know make that < 2.65. We are now in very good shape here and don’t want to get shake out too early.
Still here? Well, then how about crude, which I didn’t get a fill on but I’m sure that some of the subs did. And what a beauty it has turned into. If you’re long this puppy then move your stop to < 48.27, which is the most recent spike low.
Alright, here’s the solution to today’s puzzler in all its glory:
This is actually quite easy and in some way I hope that you figured it out yourself. This is what you do: Simply forget about the quick spike lower and look for context that connects the current trading range of what could be described as a mutated inverse H&S pattern with it’s ‘setup’ – i.e. the range/formation that preceded the spike lower.
In this case this yields us a pretty nice trading range and here you are choose from various entry opportunities based on your trading style. For example you could enter right here with a stop below the most recent major spike low, in this case that’s ES 2335. That’s actually what I just did – I added a very small long position here.
Or you could wait for a reversal much lower toward 2345 where we have the 100-hour SMA. That’s my personal lens and use whatever floats your boat. I think it’s reasonable context in this case as it has previously been retested a lot from below. The advantage here is that your ISL is almost the same as with the higher entry but now you’re running the risk of not getting an entry at all. Higher risk on the entry side combined with lower risk on the stop side (and thus a larger position size).
OR you could wait for a breach of 2364 which is the upper range terminated by the rising red diagonal (always make sure you have at least three previous touches). I didn’t mark that on the chart – so consider that entry 3 – sorry. That’s more of a momo play and the advantage is that your stop would be much closer by – around 2350 plus minus.
So which one do you pick? Well actually you can run with all three scenarios and this way scale yourself into the position slowly. In case you missed it – I wrote a pretty nice post on the subject which shows you the math involved. Have fun but keep it frosty.