When to trade a Down Trend Line Breakout?

An anticipation entry

"It is better to be late to a party that is going on than to be early to one that is cancelled" ~Homma

I often advise beginners to buy only on the breakout of a base.

why?

Because a breakout signals the start or continuation of an uptrend.

And we always want an uptrend, right?

But what about a Down Trend Line (DTL) Breakout?

Can we buy a DTL Breakout?

If yes,

Would that still not be inside the base?

When to buy DTL BO as compared to a Base breakout?

In this article, I will answer all the above questions and also tell you which DTL breakouts will give you a higher probability of success.

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What is a DTL breakout?

DTL Breakout is the price breaking out of a downward-sloping trendline resistance.

It presents a valid entry point. Often, this is an entry earlier than the actual base breakout entry (see the example marked on the chart below).

A DTL breakout does not mean a change in trend, yet.

It just means that there is a possible “change of character” from the prevailing downtrend (on a lower timeframe) to a sideways price action.

Now, when you enter a DTL breakout, you are essentially “ANTICIPATING” that there will be a resumption of the higher timeframe uptrend.

A DTL breakout entry therefore is an anticipation entry. Anticipation of the change from the prevailing downtrend to an uptrend followed by the actual base breakout.

See a DTL Breakout in MMTC below. Note how the reversal of a lower timeframe downtrend to uptrend hasn’t occurred yet.

MMTC lower timeframe. Showing the downtrend. Pivots marked for clarity

So, is this a good DTL breakout to trade?

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What is a good DTL Breakout?

I differentiate a good vs. “not so good” DTL Breakouts by looking at 2 parameters. (Notice I say “not so good” as opposed to bad. why? Because both are anticipation only.)

1. Presence of a Higher Low (HL):

   A DTL BO with at least 1 HL (more the better) is a sign of strength. For an uptrend to begin we need at least 1 pair of Higher High- higher low. Having an HL already is half the job done (Note: MMTC had 2 before the DTL BO). To make it clearer, look at Neuland labs; an example of a DTL BO that does not have a Higher low yet (caution: This doesn’t mean that the DTL will fail. It just means that it may take more time for the reversal).

1. Tightness:

   The smaller the range of the last down leg before the DTL breakout i.e., the difference between the latest pivot high and the latest pivot low, the better risk it provides (better risk = smaller risk).

   The reason you are making an anticipation entry is also to get a better risk on the trade, hence go for a tight pivot.

   How tight? anything below 5-6% sounds great.

One last thing (actually 2).

If the difference between the actual pivot high and the DTL BO pivot is not more than 4-5%, then I think it’s not worth the risk.

A DTL BO (anticipation) entry is only giving you a price that is at a 5% discount as compared to a less risky (high confirmation) Breakout entry. Is that 5% worth?

Secondly, a DTL entry might be a tad bit lucrative as compared to a Breakout entry during a market condition where breakouts are not having much success, i.e. a sideways market or an Uptrend under Pressure (in MarketSmith lingo) wala market.

Lastly, a DTL Breakout entry may fail just as frequently as any other entry. Worse even, it may fail after going sideways for some time (opportunity cost). So, the more important question is when to use a DTL Breakout as opposed to a Base Breakout.

Quick Quiz for you:

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That's all for today.

before signing off I want to reiterate the fact that trading is a process but it is also personal.

Some of you will be inherently attracted to a DTL Breakout while some of you will like the “ONE HORIZONTAL LINE” Base Breakout better (and easier).

Both are correct. There is no right or wrong here. Each has its own Pros and Cons. But just know them inside out.

If you are not sure yet about your style and method, Sakatas Homma helps you find it methodically.

I do that in 2 ways:

1. The Sakatas Homma TA masterclass for beginners:

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   Watch my 1st session of the spring 2023 batch.

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Yours

Sakatas “Methodical” Homma.