Qualification
The question whether to follow a break of a trigger level or not depends on more than one thing.
It could be an obvious level, like breaking out to new All Time Highs or break of a multiweek range to the downside. Or it could be a confirming a breakout from a short term bottom.
Usually you follow a break like in the old days, often to see the market reverse for a loss. For more on this subject, do a quick research on “Turtle soup” where the people were trained by the man who minted the Turtles. This was to follow a breakout based on a few rules. After a while, the market sniffed this out and (with the help of locals) started to frontrun and sell when the Turtles bought and got stopped out for a loss. The “Turtle soup” was finished.
However, there are a few rules to use in order to decrease the likelihood of getting caught in these reversals.
In DeMark- these are called Qualifications.
There are certain setups when the market is more likely to follow through of a break, be it Trendline, Prop trigger, TDST or above mentioned situation.
The rules are exactly the same for moves higher and lower but in this tutorial we use a move higher (so everything is followed by: “the opposite for a move lower”)
In short; the theory is that when enough people are positioned in the same way and Not for a breakout, the probabilities of a hold of the break increases.
Rules
The number one rule is a preceding close in the opposite direction of the resistance.
For example: Trendline resistance is tested but the market closes down and below it. The market players expect it to hold and sold. The Trendline remains resistance the next day but if a break is seen, a qualified break could incu with a close above. However, the market then needs to Confirm in order to qualify the break.
It needs to open higher than the close the day before and the open must not be the high tick of the day. This Qualifies the breakout and leads to a lower risk to see a reversal.
The other options are: 1 Gap that holds but with a lot of conditions
2 The distance to the broken support is far enough
This is then applied on all timeframes so for a break to be “good” in the bigger picture charts, a weekly Trendline break is likely needed.
The optimal top
For the downside and a TDST break that most will spend their lives trying to catch.
Other factors:
Note here that a break and hold above a Trendline for a number of bars then is considered broken if it more or less repeats the above Qualification. This is only about the Probability of a break to be good or not and decrease the risk for a reversal.
A break that holds for a number of days should most likely be considered a break versus the breakout.
Application in trading strategy
Playing the break:
If no position is held and the markets breaks the resistance, a long is put on. If the day after (bar) opens up and then ticks above the open, break is Qualified.
If instead the market opens down Or the Open is the high tick, long position is exited.
Playing the resistance:
One of the best signals to act on in our view is when the market is coming from an upclose.
When tested from an upclose, the resistance is faded as probabilities are high on a reversal in the near future. This works very well for all resistances TDST, Prop triggers. They act as resitances if tested from an upclose.