STRATEGIES

In the last installment of a three-part series, professional trader, Ken Calhoun of TradeMastery.com and DaytradingUniversity.com, shows how to find strong trading entries.

In the first two articles of this series, we looked at price action patterns using daily trading ranges in part 1 and volatility signals in part 2. This time, we’ll be taking a closer look at breakout trading with price action patterns, and adding to winning breakouts by scaling in to wide range successful setups.

Looking for “outlier” or “special case” price action breakouts primarily involves looking for exceptionally strong trading entries as they are occurring. A common error is for traders to underestimate just how far a price-action breakout will move, and therefore miss out on continuation trade entries. By combining specific price action entry signals with scaling in to winning trades, new opportunities are available for traders to add to price-action trading positions as breakouts continue.

Price Action Pattern #1: Adding to Winning Trades With Price Action Scaled-In Entries
On daily candlestick charts, one strong price action pattern to follow is a breakout above cup pattern highs, as seen in Figure 1 [Citigroup, Inc. (C)]. Each sequential cup pattern provides a new price-action entry signal, as shown by the green arrows. Whenever a trade continues in-trend, the initial position is added to, with an equal number of shares.

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For example, the first trade signal was generated on August 6, at just over 27.5; the second trade signal generated August 20 at just over 30.0, and so on. Adding to price-action cup breakout continuations can be an effective trade management strategy, because it allows the astute active trader an opportunity to scale into winning positions.

For swing trades, an average stop of 1.5 points is a good trailing stop value to use, which is then trailed starting with the second scaled-in trade in the series. Starting off small (no more than 100 shares), then building a trade over time, with price-action continuation entries, can help potentially minimize costs of initial stops, while optimizing the profits on successful trade sequences.

NEXT PAGE: Two More Price Action Patterns

Tickers Mentioned: C, MRK, VVUS