One indicator that I use to increase my odds on whether or not to trade with or fade a breakout (especially first hour of regular session) is to take a look at Advance/Decline. I trade NQ, so the nasdaq advancers and decliners are what I'm paying attention to. If advancers are outnumbering decliners by a wide margin, lets say 600 or better. Even better, 2 to 1. Then by all means, just buy, preferably the first dip. However, if I miss the first dip for whatever reason, then an upside breakout is more likely to punch on through resistance and keep on squeezing for more upside, when advancing stocks heavily outweigh decliners. The same for shorting on downside moves. Many more stocks declining than advancing then short. It seems to me that breakout failures are much more likely to occur when the market internals are more mixed and advancers/decliners are closer to being even or at least not greatly onesided. I know that this is real simple but it seems to increase my odds of getting gainers, when I trade in the direction of what the market internals are telling me. It is no holy grail, but that's what stop losses are for. In short, if nasdaq advancers are outnumbering decliners 2 to 1 at 9:40 am, I'm not likely going to fade the next upside attempt at a breakout. The odds of that being a good gainer just don't make me want to go for that trade.
Hi plumlazy, thank you for your response. I agree market internals seem to have a big effect on the probabiblity of it working. I was wondering if you think divergence of the A/D has any significance? For instance there are some days where you see a huge a/d ratio right off the open with a nice rally shooting price up. Then pullbacks and continuation breakouts occuring. I've noticed that usually the a/d levels don't match the initial force of the rally and smaller and smaller a/d ratios, albeit still quite high (over 600), develop. In these circumstances I see the continuations faking to the upside a lot more and pulling back before inching higher and then faking, add infinitum. Just a thought. Anyways, thanks again.
Just a general thing I've observed from experience.. when there is a trend, it takes quite some time for it to flatten out into a trading range and then reverse trend. I've found the reversal time to be roughly 40-50% of the trend timelength. For example: We have a solid uptrend with higher lows on the significant dips and higher highs following. Say this uptrend lasts 2 days, meaning we will encounter 1 day worth of sideways chop before expecting a potential downside break. Or, if an uptrend lasts 4 hours in the morning, I'd expect around 2 hours of chop (around lunch ? ) before it might truly reverse trend. This allows the MA to flatten out , to shake out the bulls who keep buying new highs, and to give more confidence to eager bears. Based on this rule, it would be beneficial to continue buying dips during the trend, assuming there hasn't been any suspicious trendline breaks and definitely avoid shorting until the trend has fizzled into chop.