buy breakout

3 sell breakout

Figure 6 The following day, prices move down somewhat. I now have staring at me on the chart. Prices are in congestion. I dont know if theyll stay there for 25 days, but until then I will be very cautious. The closer it gets to 25 days, the more significance the envelope will have.

However, i notice that I now have a new 1-2-3 that is much tighter than the old one, and which gives me a lower risk trade. This 1-2-3 was created by the low of the last leg down which gave me a new #1 point, the high of the last leg up which gave me the #2 point, and todays price action which has given me the #3 point.

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8105

ky breakout

;r- initial stop 1

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7125

Figure 7 Shows a breakout of a 1-2-3 low. Im long where my buy stop was. My initial protective stop is one tick below the start of the leg up that resulted in the breakout, which is a new #3 point brought about by todays price action.

Since the #2 point is in congestion, a breakout may go only as far at the old #2 point. 1 must be careful to cover my costs and pull to breakeven as soon as possible after entering the trade. That way I will not be penalized if the breakout is false.

Trading By Tlie Bool< - Part II

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start of envelope

----{-buy breaJ<out of «2 high

Figure 8 Prices advance for two days and tlie very next day prices drop back down again and for several days they flirt around with the area. I have numerous opportunities to extricate myself with a profit as prices stay mostly above my entry price,

I now have a new potential trading range. From the breakout of the previous very abbreviated congestion, there has been a gap up to the present congestion. I find myself looking at / again, so I draw in the envelope lines. I start the envelope with the large magnitude day that had its closing price right in the middle of where all the congestion centered in the days that followed.