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The best trading setup

My favorite type of trading setup (with a bar-by-bar analysis)
The best trading setup

Today's a good chance to look at my favorite series of events on the NQ.

  1. Market opens.
  2. Price breaks out in one direction, but fails.
  3. Price breaks out the other way.

I'm oversimplifying a little, but this type of action is pretty common, especially with the NQ.

Here's an example:

Monday morning, price pushed up, failed, and then collapsed down in a big way.

Most trading resources tend to take a screenshot of the move, name it something, and then make you feel like you learned something.

Let's not do that here.

Let's instead get a little deeper into WHY this is such a powerful setup (and how to trade it).

Breakout failures are powerful because they create what Bob Volman calls "double pressure".

First a couple of definitions:

Single Pressure = what happens when one side enters the market.

Example: Basic breakout trade.

Pressure is coming from Bulls. Bears are sidelined and aren't acting in a big way.

Double Pressure = what happens when one side is triggered to exit and the other side is triggered to enter.

Example: Breakout failure.

Pressure comes from both Bulls and Bears as one side realizes they're wrong and exits, while the other side eagerly piles in.

Again, I might be oversimplifying, but that's my takeaway from Volman's work.

The result is 2 sides acting en masse - aka, "Double Pressure".

The more volume behind these moves, the better.

That's why the opening moves on NQ tend to be crazy - there's a ton of volume coming in, and multiple breakout fails happening.

In Monday's case, you've got a lot of Bulls buying in the opening minute.

It looks like we're breaking out above this line:

Bulls try to make 2 pushes above that line - both times the chart looks very positive and probably attracted a lot of late Bulls.

But, price couldn't close with bullish strength on either of the first 2 minutes.

As we failed on that breakout, Bulls realize they're wrong and Bears pile in eagerly.

Because of the quick, big moves, you can be sure that the Bulls feel the pain right away and will pull the plug quickly. At the same time, Bears love what's happening and will jump in.

Minute #1: Fail and weak green close.
Minute #2: Fail and weak green close.
Minute #3: Stall and weak red close.
Minute #4: Bears flip it and come in strong, and even break the low of the day so far and close below it.
Minute #5: The bearish breakout holds. Price retests the 1m low but can't close above it.
Minute #6: Boom, the big move.

Minutes 1-3 suck in a ton of buy orders.

Minute 4 is the Bulls' "oh shit!" moment and the Bears' "let's go!" moment.

Pressure 1 is the Bulls exiting their long positions. These are sell orders.

Pressure 2 is the Bears entering short. These are also sell orders.

Result --> DOUBLE Pressure.

There's another key moment that's worth studying, though:

Minute 5 is really interesting because it's ALSO a moment of potential double pressure.

Pressure 1: Bears taking some profit as we test the low of the day. These are buy orders.

Pressure 2: Bulls aggressively trying to get in on a potential fail/push back up. More buy orders.

But, it wasn't enough to break the level. Instead, it's just a pullback to the level for a retest and.....a collapse.

It's not easy to judge the ebbs and flows of strength and weakness. That's why I watch the same levels every day:

  • Premarket range high/low.
  • 1-2 obvious mid-range horizontal lines.
  • 1m and 5m opening range high/low

Watching limited levels makes it easier to build a narrative about what's happening in the market and how the 3 sides of it (Bulls, Bears, and Sidelines) are thinking about it.

Here's the premarket range:

We know a lot of people are going to be looking at this little range that formed ahead of the open:

Here's the minute 1 candle:

At one point this was a big green candle that looked like it was heading up to test the premarket high.

Here's minute 2:

Here's minute 3:

Minutes #2-3 are why the NQ can be so tough to trade - any late entries on either side can be shaken out really quickly. In Minute 3, late Bears could be spooked out by the semi-neutral close.

Here's minute 4:

Boom!

But keep in mind, while this looks great in hindsight, check out the close - price tested the low of that little yellow box range and pushed up quite far, almost all the way back to the low of minute #1. Are we going to retest or fail at that level?

Here's minute 5:

I actually got spooked when price climbed back up over the low of the opening 1m range.

I jumped back in as soon as we closed underneath it - I'm not great at pullback entries but in this case it set up pretty nicely.

Here's the rest of the move:

I don't think you can judge the power of a breakout unless you're looking at the catalyst that leads to it.

In this case the opening moves means:

  • Big volume
  • Double pressure
  • Lots of pain/excitement

I love setups like these where you can explain wtf is happening. If someone points to a chart and tells me they see 3 black turtles or a spinning supernova or any of these so-called patterns....meh. There's no reasoning behind them.

If you're interested in reading material I highly recommend with solid reasoning behind the moves, my top 3 are:

Lance Beggs on breakout failures  

Expecting a Breakout Failure
I recently posted the following image on the YourTradingCoach Facebook page. For the sake of this article, ignore the text in the yellow box. Actually… don’t ignore it… put it asid…

Bob Volman on double pressure and buildup

Understanding Price Action
Forex Price Action Scalping

Tom Dante on his SFP
https://www.youtube.com/watch?v=NrIXfv94Jgs

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