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October 3, 2022
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Guide & Analysis

Trading: How to identify a break in the chart?

Some criteria for identifying a breakdown of support and resistance

In trading there are many events that happen where there is no clear, defined rule for naming certain things. One is the disruption! Each trader has their own criteria that define what a breach is and at this point I am passing the criteria that I use.

Rather, it is worth mentioning that a break is an important event where it generally indicates that the price will move in the direction of that break. A good example of this was the breakdown of $ 20k in Bitcoin, which until the moment it happened was the historic top of the digital asset. 3 years later the price breaks this range and, in less than 1 month, plays for $ 40k, more than doubling the value from the break.

But come on, what are the criteria I use in my operations?
Well, I use 3 different conditions – 1 main and the other 2 confirmations.

1 – Closing the candle overcoming the support and resistance zone

So, there is already a point where many traders diverge. Some, like me, use the closing of the candle, that is, only consider the break after the candle (regardless of TF) closes. And others use the criterion of “If it breaks, even if it didn’t close, it broke”.

See, the break in the chart is an event that gives the trader information to take action. So, be very careful about this.

In the image above, we have the $ 20k resistance break on the daily Bitcoin chart. See that the candle closed above the resistance and in this first criterion we have a break, we must pass on to the others.

2 – Above Average Volume

You can see in the image that the bar graph below is a volume graph. There is a subtle orange line that represents the moving average of volume (in this case an MA21). The other criterion is:

After the 1st (the candle was closed in addition to the support and resistance) check if the volume, in this candle, is above the volume average.

This is a simple and direct double confirmation. But there are also the peculiarities of each Trader. One can consider, for example, a margin of error in the average of the type:

Ex: Consider breaking if the volume is at least 20% above the average

This can help prevent false disruptions.
Finally, the third criterion, less used but not less important.

3 – Analyze the wick beyond the closing of the candle

This criterion is a little more delicate, see:

If the candle was closed above the resistance, but it formed a wick with a maximum distant from the closure, like a ‘pin bar’ (bar with a long ‘tail’ or shadow ‘upper or lower with a smaller body) then we can disregard the break .

Break in the Ada chart

This measure is intended to prevent false disruptions. A large shadow indicates rejection and the price may ‘come back’ from there.

In the case of the image above, we have 1 close above the resistance (ok), we have 2 volume well above the average (ok), but we have 3 a big shadow forming a ‘Shooting Star’ (a shooting star, candle with potential for reversal) (not ok).

For those who use this criterion, on that occasion, it would not pass and would not give a purchased ticket continuing the trend.

PS: In the previous candle the shooting star, in the image above, it closes below the resistance – by our criterion (1): It didn’t break!

Clarifying about disruptions or any situations in Trading

All of these are conditions for transactions used by Traders as decision criteria. But None of this is a rule! We need to make it clear that Trading is not an exact science.

It can happen that you meet all the criteria and the price goes against and catches your stop – that’s part of the process.

Make tests!

Put these criteria on a demo chart, use the Br.Tradingview for that and test. Look for probability.
Do about 20 operations like this and see how many times it would work and how many it would not. So, you can get a sense of whether it is worth using this disruption setup in your operations.

In the image below, the continuation of the Bitcoin chart after it broke through the $ 20k.

Break in the BTC Chart at 20k

See how a profitable graphic breakout can be very profitable. It doubled in less than 1 month.

It is! Operate safely, with caution, do many tests before and
Good Trades!

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