So you have missed an early entry into the trend or want to pyramid your existing position, this is the strategy that will help you do it. Sell Break Downs & Buy Break Outs is a strategy that is in direct conflict of the first strategy we shared with you that is Buy Low Sell High and is used in a different market condition.
Derivatives Trading involves substantial risk of loss and is not suitable for all investors. Past Performance is not necessarily indicative future results – Read Full Disclaimer
Sell Break Downs & Buy Break Outs
There are times when fading BO/BD can lead to financial disaster or missed opportunities. Lets dive into some examples where you can get a feel as to when to go with the BO/BD. Lets see this Strategy in action..
How to Sell Break Downs?
Selling Break Downs is lucrative when you have a lot of buyers trapped and are anxious going into a new trading session.
This is so because when one side of the markets suppose buyers are anxious Sm has added incentive to push the envelope only so far as to cause enough pain to the trapped buyers to make them throw their positions.
The more adamant these trapped buyers greater the subsequent move and hence profits for the SM. In the example above we can see following important points,
- 4 attempts by buyers not resulting in any elongation to the upside.
- Every time the price reached the support of the range buyers came in and bought.
- But their buying could not extend the range in any meaningful way to the up side.
- This meant that the buying was being supplied to by the SM at higher levels.
- When towards the fag end of the range prices closed right at the lows of the range.
- The next day gaps lower and this time the buyers could not push it back up, this is the straw that broke the camels back. We get a huge move down the next day.
- The news event contributed to the volatility, otherwise the same move would have spanned over a number of days instead of a couple of days.
How to Buy Break Outs?
Buying break outs is obverse of selling break downs. The requirement for buying break outs is exactly opposite of selling break downs. You need a lot of trapped sellers to get a reliable break out.
Whenever we have one side trapped the SM generally uses it to push them out of the markets. And that gives us some dynamic moves in the markets. Lets look at some examples,
- In the chart above we see huge accumulation over a period of 2 months by Sm, as evident from the big ‘b’ shape.
- The current month moved above the loop early on, thus showing the intent of the buyers.
- The previous sellers try to defend their positions as marked on the chart. But SM absorbs all the selling.
- Hence the sellers position was precarious as the longer t/f SM was buying from them.
- An attempt to MD the price could not go too far, and that sealed the deal for sellers.
- As Sm enters and ramps the price higher trapping all the sellers, this is the right time to buy the break out.
- In this chart we have 2 examples of break outs.
- the first one shows multiple attempt to MD the price, not resulting in any continuation lower.
- So all the sellers were trapped.
- And once the buyers pushed the price beyond the range high we got furious rally forcing the sellers to cover.
- In the second example we have 2 attempts to MD the price. But the second one is because of a news event, resulting in a big down move.
- The whole pattern looked like a ‘q’ and that prompted us to a potential snap back rally.
- Once the rally went above the range high and found acceptance we got nice follow through and a successful break out.
Sell Break Downs & Buy Break Outs is a strategy used by most novices, but few are successful doing it. The reason for that is they are not able to distinguish between the right time to apply this strategy and the not so right time. When time is not right to Sell Break Downs & Buy Break Outs we go to the other strategy of Buy Low Sell High.