In my last post on the topic, I talked about how the market often establishes a rhythm which can help you set price targets. One mistake a lot of traders make is that they play setups that are smaller than the main rhythm of their chart, but expect the resulting move to be as big as the main moves on the chart. I’ll show a few examples.
Let’s say you are playing for breakouts up after higher lows, and breakouts down after lower highs. I’ve drawn blue lines over the main rhythm of the chart, and marked a potential entry (click to enlarge):
The orange line represents the breakout zone where you’d buy. But, what’s wrong here? The pullback to the supposed “Higher Low” is not the size of the general market rhythm! In fact, it’s just one bar. So if you are playing for small-frame breakouts, you better jump back out with small-frame profits or you could be in for a disappointing trade.
The next screenshot shows the horrible outcome of that trade, and takes us to the next potential setup:
Again, this pullback to the potential “lower high” is just a couple bars wide. Not the size of our basic market rhythim by any standards. If you get short here, prepare for the worst.
The next screenshot shows that, after the fact, this tiny so-called “lower high” doesn’t even look like a small peak at all! I haven’t marked every single wiggle, but if you look, you can see lots more places where traders can be fooled if not in step with the markets. Finally, I’ve marked an actual, in-rhythm lower high (it’s the one with two exclamation points, followed by a huge run down). See the difference?
