How to draw a trade zone for false breakout / liquidity hunt?
Once you spot a location to trade from (be it a liquidity hunt, or a false breakout + market structure break) - that's only half of the job. The next most important step is to draw a correct zone which gives you a safe and reliable way to enter and define your risk.
I've always found that drawing zones which help you define your entry & risk is an art, more so than science. And this doesn't work for me - because if it's not driven by a process, I'm bound to make mistakes in this important step. Hence, I wanted it to be more defined - to the level that it could be given to a programmer who could code it.
Primary method of drawing the zone
1) Find the candle that generated the signal
2) Draw a rectangle into left side of price on the signal candle (green rectangle)
For SHORT signal
=> 3) Draw (yellow) zone using the highest + last UP candle which exited this rectangle
For LONG signal
=> 3) Draw (yellow) zone using the lowest + last DOWN candle which exited this rectangle
4) If the candle right after signal candle does not test this zone, then trade this zone as a signal - ELSE - look for the secondary way of drawing the zone
Secondary method of drawing the zone
1) Find the signal candle and look left of it
For SHORT signal
=> 2) Draw zone using last UP candle which broke an HH pivot
For LONG signal
=> 2) Draw zone using last DOWN candle which broke an LL pivot
3) Discard the zone if price revisited that zone before giving the signal
There are many reasons why these zones work (if your overall trade is correct)
- These will be the candles which are guaranteed to be engulfed by the signal making candle
- If these are institutional trades, most likely it's here where they set the fakeout trap. Hence, when price comes back to these zones, they have no need to take prices beyond your stop loss as there's no more liquidity there
- If these are those amateur folks who were trading the breakout, this is where the smartest of them bought/sold and will be the first in line to exit
If you have feedback on how to improve this zone drawing process, please leave your feedback in the comments below.
Cheers!
I've always found that drawing zones which help you define your entry & risk is an art, more so than science. And this doesn't work for me - because if it's not driven by a process, I'm bound to make mistakes in this important step. Hence, I wanted it to be more defined - to the level that it could be given to a programmer who could code it.
Primary method of drawing the zone
1) Find the candle that generated the signal
2) Draw a rectangle into left side of price on the signal candle (green rectangle)
For SHORT signal
=> 3) Draw (yellow) zone using the highest + last UP candle which exited this rectangle
For LONG signal
=> 3) Draw (yellow) zone using the lowest + last DOWN candle which exited this rectangle
4) If the candle right after signal candle does not test this zone, then trade this zone as a signal - ELSE - look for the secondary way of drawing the zone
Secondary method of drawing the zone
1) Find the signal candle and look left of it
For SHORT signal
=> 2) Draw zone using last UP candle which broke an HH pivot
For LONG signal
=> 2) Draw zone using last DOWN candle which broke an LL pivot
3) Discard the zone if price revisited that zone before giving the signal
There are many reasons why these zones work (if your overall trade is correct)
- These will be the candles which are guaranteed to be engulfed by the signal making candle
- If these are institutional trades, most likely it's here where they set the fakeout trap. Hence, when price comes back to these zones, they have no need to take prices beyond your stop loss as there's no more liquidity there
- If these are those amateur folks who were trading the breakout, this is where the smartest of them bought/sold and will be the first in line to exit
If you have feedback on how to improve this zone drawing process, please leave your feedback in the comments below.
Cheers!
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