Microtrend breakout method

The beginning of all beginnings

The trading process begins with an analysis of the market situation. The main question they seek to answer is related to the outlook for price movement. In what direction will the price move today? There are only three of them – up, down, and sideways, but which of them will the price choose?

It is in this case that Lance Begs recommends that you carefully study the structure of the market and respond correctly to any changes in it. Based on the book, a competent trader should be able to:

  • Determine the direction of the trend;
  • Understand the nature of the emergence of new bars;
  • Adjust your trading methods to the changed market structure.

In one of his articles, Begs described a method of entering the market on a breakout of a microtrend. We will not delve into the “philosophical” part of his concept, let’s just technically consider this method itself.

Two roads to one goal

Two roads to one goal

Since the author says that the TF and the currency instrument can be selected arbitrarily, for example, we choose the TF M15 and work on the EUR / USD currency pair. Now let’s imagine that we have some directional downward movement with a slight price correction on the chart. Few traders will risk trading against the trend. According to the technical analysis algorithm, the first thing we should do is draw a trend line.

Did you know that trend lines can be drawn in different ways – according to the “classic” and “Lance Begs”? Let’s see what the fundamental difference is here:

  1. In the first case, the trend line should be marked “at the bottom”.
  2. In the second, it is drawn “on top” of the corrective movement.

We plotted the trend lines in different ways, but this is not the only difference between them. Next, you can verify that they:

  • They take into account different types of trend breakdown by price:
  1. When working with a classic trend line, you need to wait for a true breakout;
  2. When working with trend Begs, you should focus on a false breakout.
  • Signals to open positions in the same direction are given in different ways:
  1. Breakdown of the classic trend line by the price in the downward direction with its further consolidation;
  2. Breakdown of the trend Begs by the price in the downward direction, followed by its “rounding off”.

In the framework of the method under consideration, after the trend line is drawn, we have to patiently wait for a false breakout to appear. The construction of a trend line “along the lows” is permissible here only in the absence of a false breakdown of the upper trend line. Based on the above, in relation to our example, we can deduce the following logic of this approach:

  • If there is a certain directional movement with a price correction, we draw the trend line “tops”.
  • Entering the market will be considered a false breakout of this trend.

Let’s take an example of entering the market from the position of each of these methods:

1. According to the classical analysis:

In the classical trading approach, after the price breaks out the usual trend line and then consolidates below it, this is a signal to enter the market to continue the trend. On the chart, this signal will look like this:

2. According to Lance Begs:

The breaking of the upper trend line built on the tops of the corrective movement, with further rounding of the price, is also a signal to enter the market to continue the movement. On the price chart, these signals will look like this:

The difference between these two methods is that according to Begs, we open a position much earlier and the price after entering the market has time to go a longer way.

We examined with you the theoretical side of the microtrend breakout method – the Lance Begs method . In the above example, there is only one significant inaccuracy. The fact is that entering the market according to the “classic” of technical analysis by this method is allowed only if a false breakout is not recorded on the Begs trend line:

To all of the above, it should be added that pending orders can also be traded using Begs.

Stop Loss should be placed behind local highs / lows.

Open positions can be closed in several ways:

  1. By Take Profit;
  2. By breakeven;
  3. Until a signal for a market trend reversal or until a new price correction.
  4. The worst option is to close by Stop Loss without transferring the deal to Breakeven. This is a losing trade, but none of the traders is immune from force majeure circumstances that can occur in the market.