Get started

Fakeouts

BOLLINGER BAND SQUEEZEBollinger Bands -------------------- We all are familiar with the much popular Bollinger bands (BB). It has two bands - Upper BB and Lower BB. These bands envelope the price of an instrument and are plotted at a standard deviation level above and below a simple moving average (sma) of the price (20 sma in most cases). BBs help in determining whether the price is high or low on a relative basis. The Squeeze ----------------- One of the most effective way to utilize BB in a trending environment is to trade the squeeze. In order to understand squeeze you must know what is volatility. Volatility is simply the rate at which the price of an instrument increases or decreases over a particular period. In other words, If the price of an instrument is fluctuating up and down very fast in a short interval of time, hitting highs and lows, it is said to be highly volatile. On the other hand, If the price is moving up or down more slowly, or is relatively stable, it is said to have low volatility. BB works on the basis of volatility. When the volatility is higher, the BB expands and when the volatility drops to historically lower levels, the BB squeezes. John Bollinger used an indicator known as 'Band width' to measure volatility. According to John when Band width drops to its six month lows, it leads to squeeze. Squeeze is seen when price trades in a narrow range, or consolidates as we call it very often. Under such conditions, the UB and LB come closer to each other or pinch together. It often reminds me of watering plants with a garden pipe. We pinch the pipe so as to control the flow and increase the range of sprinkles. Same is true for BB. The pinch or squeeze (low volatility environment) leads to expansion (high volatility environment). So low volatility leads to high volatility and vice versa. Points to be noticed before trading squeeze: First, the price must gyrate in a narrow range for some time; Secondly, the Band Width should drop to its six month low value; Thirdly, expansion in the direction of the primary trend will bring the odds in your favor. Following primary trend will also help avoiding fake moves against the trend. Above Nifty chart is a good example of squeeze on the daily timeframe. The band width value reduce to 0.02 in July 2021 from 0.09 in 2021 June. Also observe the price movement and a small fake out against the primary trend at the end of July. Finally Nifty expanded in the primary direction. I hope you enjoyed reading. Keep liking for more posts. Regards
NSE:NIFTYEducation
by Bravetotrade
2
How do the Breakout traders get trapped? Part- IIPsychology and Behind the scenes stuff: 1. At the BO, there was a massive bullish candle with a very high volume. This took out the previous resistance level. 2. The retailers saw this opportunity because the price closed above the previous resistance. Hence, they entered Longs. 3. The BO was followed by a Doji and then a Bearish candle. This indicated no Bullish follow-up. 4. The next candle was the last try to trap more longs before breaking down. This is indicated by the good volume on this candle. 5. Finally the price broke down with back-to-back bearish candles and reached the previous swing low. Warning candles: 1. Doji + Big Bearish candle indicating that there is no follow-up on the BO 2. Relatively good volume on doji indicates significant selling pressure. Never a good sign for a breakout. 3. A bullish breakout must always be accompanied by a good follow up, else it cannot sustain. Bullish BO needs good bullish candles, NOT dojis. P.S: I am not saying the fakeouts can be avoided. But there are a few cases where fakeouts can be avoided. Also, this is NOT investment advice. This chart is meant for learning purposes only. Invest your capital at your own risk.
NSE:BANDHANBNKEducation
by johntradingwick
34
How to avoid Fake Breakout? A lot of retailers may have gotten caught in this fake breakout in TCS. I provided that rough path (which I anticipated it would follow) in my original idea because I believed the conditions were not right for a breakout at the moment. The majority of the time, we cannot avoid getting trapped in fake breakouts. But in the recent case of TCS, the fakeout could have been avoided. Underlying logic: 1. The market already gave 8% in the impulsive move and created a high. Don't you think it needed a little rest before the next leg up? 2. If you recall my lecture on market structure, you already know that after the creation of a high, we must come down to create a new higher low. The market cannot keep making new highs without creating a higher low. 3. There was a Bearish divergence. The price was moving up and up but the RSI was creating a lower high indicating that there isn't enough buying pressure. (I have already covered this in my older posts) Warning candles: As soon as there was a breakout, there was a series of Hammers + Doji indicating that there is a problem with the follow-up. There was a significant volume on hammer & doji, which is never a good sign for a breakout. It indicates significant selling pressure. A bullish breakout must always be accompanied by a good follow up, else it cannot sustain. Bullish BO needs good bullish candles, NOT dojis. P.S: I am not saying the fakeouts can be avoided. But there are a few cases where fakeouts can be avoided. Also, this is NOT investment advice. This chart is meant for learning purposes only. Invest your capital at your own risk.
NSE:TCSEducation
by johntradingwick
24