161 First Break

An early signal of a correction ending a trend resuming.

Strategy Name: 161 First Break

Type of strategy: A momentum strategy.

Conditions for use:

This strategy is used when the market has been trending in a clear direction but recently has had a big pullback. We’re waiting for price to make another big move in the direction of the trend and that’s what will activate this strategy. The strategy aims to forecast new trend legs starting and enter into them.

Drawing the fib swing:

When there has been a consistent trend but we’re now in a correction of that move we can draw this fib swing every time there’s a failed move for the trend and the correction goes further. Most of the swings you draw here are not going to fill. One of the benefits of this strategy is helping keep you out of persistent corrections.

Where this swing would be would keep being adjusted as the market move. The swing becomes actionable when there’s a breaking of the price action structure.

Basic strategy theory:

When price hits a 161 of this type of swing in this type of move there’s an extremely high tendency for price to either make a low there (In an uptrend) and if it fails to make it low the 220 fib will hit (Or have a very near miss) after the 161 breaks. If we’re able to spot signs of a 161 break, we can trade momentum to the 220 fib.

Things we usually see before the strategy trades:

The spot we are looking for in this trade is the highlighted area.

The type of action we’re looking for is the strong trend transitioning into a persistent correction. This has been going on for a while. All the trend moves fail. Any move for the trend are unable to break the 161 fib of their last swing. Then there’s a strong move that comes through the 161.

When it’s not working (Stop loss conditions):

When this is working, we should see some sort of bounce around the 161 and then it breaking. When we have price action like this we can bet on retests of the 161 and have stops behind the last high/low. Usually you’ll find this is just behind the 127 fib.

When 161 levels hold there can be new trend legs. It’s best to get out quickly if this strategy is failing. If there are clear signs of the 161 breaking the chances of us getting momentum through to at least the 220 fib are good. If we’re in the move the strategy is designed for there the move will be consistent and stops can be tight.

Strategy strengths: Filters out all the false moves that do not have enough momentum to make a real break. Can give clear signals that an important break has been made and momentum (At least for the short term) is going to continue to the next fib levels.

Strategy weaknesses: It bets against an area markets commonly turn. If false signals are found they can enter into the worst of spots. If this happens the market usually goes really fast and aggressively against you (But stops should take care of that).

Important

These 161 rules are designed for trading under the specific conditions laid out here. With there having been an existing trend and it having went into a lengthy correction without there being any big moves for the trend for a period of time. We’re looking to pick up a breakout in the highlighted part of the move.

In different parts of moves 161 breaks can also lead to 220s hitting but have much more complicated patterns where the simple stop loss rules here would routinely result in frustrating trades (Stopped out before big reversal). Using these rules in the correct context is important.

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