Pathshala: The Break 8/B

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Trading the Lines</h1>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Now that you know the basics, it's time to apply these basic but extremely useful technical tools in your trading. Because here  we want to make things easy to understand, we have divided trading support and resistance levels into two simple ideas: the Bounce and the Break. </span></div>
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The Bounce</h2>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">As the name suggests, one method of trading support and resistance levels is right after the bounce. </span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjl50XOAr4FKkKi3MctkPY5On_7HkbXmSEQe9JavnZhxAfM_g3zDDIZCYTRpLQaQQSOxM0Ij5mLUKbFAIXIB9flbQILwgAwGjpsxSupgXLhnaW43SqQN-zVrT4dz3UaMlWAyIFSMh3tzdE/s1600/grade1-bounce-trampoline.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="210" data-original-width="170" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjl50XOAr4FKkKi3MctkPY5On_7HkbXmSEQe9JavnZhxAfM_g3zDDIZCYTRpLQaQQSOxM0Ij5mLUKbFAIXIB9flbQILwgAwGjpsxSupgXLhnaW43SqQN-zVrT4dz3UaMlWAyIFSMh3tzdE/s200/grade1-bounce-trampoline.png" width="161" /></a><span style="font-family: "arial" , "helvetica" , sans-serif;">Many retail traders make the error of setting their orders directly on support and resistance levels and then just waiting to for their trade to materialize. </span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;">Sure, this may work at times but this kind of trading method assumes that a support or resistance level will hold without price actually getting there yet. </span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">You might be thinking, "Why don't I just set an entry order right on the line? That way, I am assured the best possible price." </span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><b>When playing the bounce we want to tilt the odds in our favor and find some sort of confirmation that the support or resistance will hold. </b></span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">For example, Instead of simply buying or selling right off the bat, wait for it to bounce first before entering. </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">If you’ve been looking to go short, you want to wait for it bounce off resistance before entering.</span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;">By doing this, you avoid those moments where price moves fast and break through support and resistance levels. From experience, catching a falling knife can get really bloody...</span></div>
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The Break</h2>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">In a perfect world, support and resistance levels would hold forever, Nifty would be healthy, and we'd all have Sensex. In a perfect trading world, we could just jump in and out whenever price hits those major support and resistance levels and earn loads of money. The fact of the matter is that these levels break... often. </span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">So, it's not enough to just play bounces. You should also know what to do whenever support and resistance levels give way! There are two ways to play breaks: the aggressive way or the conservative way. </span></div>
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The Aggressive Way<span style="font-family: "arial" , "helvetica" , sans-serif;"> <div class="separator" style="clear: both; text-align: center;">
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<span style="font-weight: normal;"><span style="font-family: "arial" , "helvetica" , sans-serif;">The simplest way to play breakouts is to buy or sell whenever price passes convincingly through a support or resistance zone. </span></span></div>
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<span style="font-weight: normal;"><span style="font-family: "arial" , "helvetica" , sans-serif;">The key word here is convincingly because we only want to enter when price passes through a significant support or resistance level with ease.</span></span></div>
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<span style="font-weight: normal;"><span style="font-family: "arial" , "helvetica" , sans-serif;">We want the support or resistance area to act as if it just received a Chuck Norris karate chop: We want it to wilt over in pain as price breaks right through it.</span></span></div>
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The Conservative Way<div class="separator" style="clear: both; text-align: center;">
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Imagine this hypothetical situation: you decided to go long INR hoping it would rise after bouncing from a support level. Soon after, support breaks and you are now holding on to a losing position, with your account balance slowly falling. </span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">Do you... </span></div>
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<li><span style="font-family: "arial" , "helvetica" , sans-serif;"> Accept defeat, get the heck out, and liquidate your position?</span></li>
<span style="font-family: "arial" , "helvetica" , sans-serif;"> OR </span>
<li><span style="font-family: "arial" , "helvetica" , sans-serif;">Hold on to your trade and hope price rises up again?</span></li>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">If your choice is the second one, then you will easily understand this type of trading method. Remember, whenever you close out a position, you take the opposite side of the trade. Closing your INR long trade at or near breakeven means you will have to short the INR by the same amount. Now, if enough selling and liquidation of losing positions happen at the broken support level, price will reverse and start falling again. This phenomenon is the main reason why broken support levels become resistance whenever they break.</span><span style="font-family: "arial" , "helvetica" , sans-serif;"></span><span style="font-family: "arial" , "helvetica" , sans-serif;"> As you would've guessed, taking advantage of this phenomenon is all about being patient. Instead of entering right on the break, you wait for price to make a "pullback" to the broken support or resistance level and enter after the price bounces. </span><br />
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjUBCdlbVeRZHMzlgp-dpIS_mXrCk-v4vqyE5Hb3jMke3TYD01uno_4wkmdvxILKx09-Xje1lOjWt9ZHnlJy8UweaiMvnCghEBBdKZJijQmajfWlX_B0iWhX2KrGVsUNiJix39w1XnIv7Q/s1600/grade1-break-conservative.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="241" data-original-width="451" height="170" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjUBCdlbVeRZHMzlgp-dpIS_mXrCk-v4vqyE5Hb3jMke3TYD01uno_4wkmdvxILKx09-Xje1lOjWt9ZHnlJy8UweaiMvnCghEBBdKZJijQmajfWlX_B0iWhX2KrGVsUNiJix39w1XnIv7Q/s320/grade1-break-conservative.png" width="320" /></a></span></div>
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<b>A few words of caution... THIS DOES NOT HAPPEN ALL THE TIME. "RETESTS" OF BROKEN SUPPORT AND RESISTANCE LEVELS DO NOT HAPPEN ALL THE TIME. THERE WILL BE TIMES THAT PRICE WILL JUST MOVE IN ONE DIRECTION AND LEAVE YOU BEHIND. BECAUSE OF THIS, ALWAYS USE STOP LOSS ORDERS AND NEVER EVER HOLD ON TO A TRADE JUST BECAUSE OF HOPE.  </b><br />
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Trading the Lines Now that you know the basics, it's time to apply these basic but extremely useful technical tools in your tradin...