Buy or Sell, Long or Short? How to know which direction to trade: Break of Trend will tell you!

To start my post series, I want to share a major concept that we implement on every single trade, the "break of trend" or "BOT". We will refer to this concept as BOT on our charts and in posts. I will discuss our process in future posts, but I wanted to start with something that you can research and see on your own before we get into further details regarding specific signals, chart setup, etc. It's important to understand the BOT concept as it will tell you when to ignore certain triggered signals and when to focus on the high probability ones.

Here are a few chart rules that we have before I get into details on the BOT concept. I will also make a post regarding chart setup and what we use, in a future post:

Rule #1: NO Indicators!
Rule #2: Plot prior day's highs and lows and current session's highs and lows.
Rule #3: Analyze price structure to determine if bulls or bears are currently in control

So, pretty simple, right? All that a chart can tell you is executed trades and volume of trades on an instrument, nothing more! Why have a bunch of indicators on a chart? Is it that hard to see what's actually going on?? No! The hard part is setting yourself up in high probability trades, and a lot of times a good trade goes against our psychology. We "want" to buy low (super low), we want "the best" price, and want to sell at the highest price possible. But think about this, what is "the best" price? There is no such thing, it's just a number. So, what we believe is to trade in the direction of the trend because this will "help" your trade. I will get into psychology deeper in a future post, this was just a quick comment.

Now, the break of trend: When lows continue to be broken, sellers are in control. When highs continue to be broken, buyers are in control. When you see both in one day or on a selected segment, there's a battle for control. The BOT signal applies on every time-frame. For trading purposes, we like to glance at daily bars, focus on hourly bars, and analyze 15 minute bars. Essentially, there can be a trend within a trend within a trend. What I mean by this is that there could be e.g. 5 BOT signals on a 1 minute chart that are within 1 BOT signal on a 15 minute chart, mini BOTs within a more significant BOT.

In the above chart, there was a BOT Long confirmed by the HL/HH setup I discuss below. But, this was also strengthened by a Bear Trap at Low of Day from 9:00 am on the chart!

Here are the rules to determine BOT:

BOT to Upside for Long Trades
Rule #1: Connect highs sloping downward for a downtrend with potential BOT to upside. *
Rule #2(a): HL/HH pattern BOT: Look for 1) Higher Low and then 2) Higher High with break out of the downtrend
Rule #2(b): Trap BOT: Look for 1) Bear Trap at Lows (I will do a post on traps) and then 2) Higher High with break out of the downtrend
Rule #3: Look for trade signal confirmation in direction of BOT

BOT to Downside for Short Trades
Rule #1: Connect lows sloping upward for an uptrend with potential BOT to downside. *
Rule #2(a): LH/LL pattern BOT: Look for 1) Lower High and then 2) Lower Low with break out of the uptrend
Rule #2(b): Trap BOT: Look for 1) Bull Trap at Highs (I will do a post on traps) and then 2) Lower Low with break out of the uptrend
Rule #3: Look for trade signal confirmation in direction of BOT

*Don't focus on exact details of tails, you want to determine the general price action.

When to know what signals to consider and which to ignore:

Quoting what I said above, "It's important to understand the BOT concept as it will tell you when to ignore certain triggered signals and when to focus on the high probability ones."

Referencing the chart above, the blue arrows represent our FL1 long signal (to be discussed in detail in future posts). Since the FL1 is a long signal, why would you take a long signal in a downtrend, you wouldn't! Knowing the direction of the trend using BOT will help you avoid low probability trades.

The application is very simple: Do not take FL1 long trades in major downtrend. Take them once a BOT Long occurs, on the break of the trend line drawn, and is confirmed by Rule 2 above.

Hope this helps and please let us know if you have any questions!