How to create Limit Levels.
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  1. #1
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    How to create Limit Levels.

    Limit Level, hereinafter abbreviated as LL are not mentioned anywhere in the classical description of trading strategies. There are levels of support and resistance, they can also be in the form of zones, can be built on the extremes of shadows, closures, etc. The main feature of LL is their accuracy.
    construction, with little or no subjectivity.
    For example, if you ask several traders to do level markup of support and resistance, then most likely they will all be different, and if done with LL - the result will most likely be the opposite, the levels will be the same, maybe their number can differ, but the osculation will be the same.

    Also, LL is quite simple to understand from the point of view of "market mechanics" (more on this later), and accordingly, trade is conducted not according to a pattern made up from history, but from real actions of market players at a specific time, giving the opportunity to readjust to the market with the convenient risk and trade options for themselves. Also, one of the benefits is accuracy, and it’s not
    just because of the selection of ideal entry points. The fact is that in most systems built on graphical analysis and price movement the closing price is very important, if it is above or below the level. And how then to determine where it is, if in one and the same area a few points in the level difference play a key role let's say the direction of the trade generally depends on it. I think many have come across this problem. But LL can only be drawn there - where he can
    be, and not elsewhere
    , i.e. you can not get confused. Yes, you can miss it (you will understand later why), but if it is already determined, it will be accurate.
    Similarly, one of the LL trade options - through false breakdown - false breakdown is either there or not, and will not be confusing. But this is not
    the only option, LL are traded on both breakdown and reversal, as with a false breakdown, and without it
    . Each of these options has its own nuances, which will be described in this topic.
    And the most important thing is that this approach works on both history and in real time, while in the future, is unlikely to change too. The reason for this is the "nature" of the LL, without which virtually no market can exist today nor in the near future. Accordingly, the range of instruments in the markets is not limited, if only there was liquidity and volatility in the instrument.
    This may be a currency pair, cryptocurrency, oil, corn, equity, other indices, etc ...
    Again, Limit Levels are the basis of a trading system, its "spine", but there are several trade options.

    Strategy Description:
    • System - breakdown and reversal (trend is a relative concept, the same rollback after a breakdown, can be seen as a reversal, both at the beginning and at the end)
    • Difficulty - medium (IMHO)
    • The main timeframe is 1D | 1W | 1MN (daily is optimal, but no way under)
    • Additional timeframe (optional) - 1Н | 15М
    • Markets - any tools
    • Features - the system involves strictly trade with a stop loss order at in this respect, they are minimal relative to the working timeframe. The main focus is on money management mathematics due to high risk ratios to profit (PL).

    In more detail, in detail, all the moments about LL, their construction methods, their variants, understanding in terms of market processes - will be further in topic because one post is not enough.
    For general clarity, an example from the LL markup, and an example of one of the options LL trading, through his false breakdown.



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    Introduction. Where does LL come from in terms of "market mechanics" and the basis of their definiti



    Limit Level is the reference point, which divides the chart into two halves, one of which is buyers, and the other sellers. LL will act as a “starting point”, moving away from which the balance of the ratio of buyers and sellers will change, and hence the price will move in the direction of the strongest, absorbing the weak, after all, in the market it is the only way possible. When some earn, accordingly, someone loses, i.e. the first earn at the expense of the second.
    In order to understand the reason for the movement and the stopping of the price, in terms of "whose actions at the terminal lead to it"(namely, this is where it all starts, after taking solutions based on technical, fundamental analysis or trite - need to buy / sell an asset), you need to deal with the impact of different types of orders on the market and price reactions for them.
    Orders are divided into two types: market and limit.
    Market orders are - Buy, Sell, Buy Stop, Sell Stop, Stop Loss. They all execute the trader’s application at the market price (as the first two), and you need to understand - market orders drive the price. So, when someone triggers an order
    of this type, including pressed directly from the terminal, and delayed like Stop, the price moves, depending on the difference in supply and demand in this place.

    Limit orders include Buy Limit, Sell Limit, Take Profit. These orders on the contrary – stop the price, restrain it as long as the incoming volume will not exceed the volume of the order itself, i.e. until its full execution or cancellation. In other words, if there will be a limit type order on the way of the price movement and if its volume is greater than the oncoming one, the price will simply stop, and this will continue until the counter volume is greater than the limit order (or until the order is fully executed).
    For even more insight: if you purchase an asset using a market order it will be executed completely after the order is triggered, only the price is very unlikely to be exactly the one that was originally desired, most likely it will be much less, as it all depends on the volume of both the application and the counter, due to which the order is executed. As a result, the final price is simply not known, you may or may not be lucky, which is not acceptable with large capital.
    The same picture with limit orders looks different. Warrants will be executed strictly at the same price, but perhaps not at once, but in parts, again, depending from the desired and counter volume. Therefore, it may take some time that there would be an interaction of price, volume with warrant, until its full execution (or until cancelled).

    Now imagine if a “big capital” needs to enter this position in its large volume, no matter in which direction. If the market gets a large order with any market order (stop loss is not an exception), then the price will move abruptly from the entry point, due to the difference in supply and demand, and therefore you will not enter at a pre-planned price. The performance will be at different prices, depending on the ratio of the available counter volume with laid down in such a warrant. As a consequence, the planned asset price will be significantly different and this situation is unlikely to suit a major player.
    Therefore, for a set of large positions, only limit orders are used, depending on the required size, they may be in a form of range trade, because if it's all done at the same price - it will be very noticeable to other participants who can take advantage of it. The same applies when exiting these large positions, where limit orders are used.

    Also, when a large position is already collected, in order for it to not be "taken away" (the struggle of the participants for the best price is not possible without the volume placed in it),it is necessary to "protect" it. This is also done by a large limit order (or several), which in turn will be a “wall” through which the price, in the event of which, cannot pass, unless the opponents own a large capital and are interested in this.

    But still it is not possible to stay completely unnoticeable on the market (the chart), because in the presence of limit orders, in many cases you can define their location (which is not always easy, but possible), and you can also logically suggest where the market orders such as Stop are placed. On the search of such places is the Limit Levels trading built, about technical details of which will be further in the topic.

    Who are these big players, for example, in the foreign exchange market?
    These are large international companies such as Coca Cola who buy currency (or futures for it) for their future mutual settlements with suppliers and customers, or hedges risks from changes in the exchange rate of the required currency. These are banks (as commercial and state) doing the same. This are also the companies that make money on speculation and investment, by simple hedge funds. And there are many such examples ...

    The main thing to understand – is the mechanism of the impact of different orders on the price itself, and be a little bit aware of what is behind it and what are the possible plans of it.


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    The basics of Limit Levels construction.

    Limit Level is built strictly according to at least 2 points of the shadows of bars that perfect match point to point (4 digits after comma).

    If the number of “hits” in LL is more than two – it is better, according to the "mechanics of the market " it most likely signals a greater amount of level with all its consequences.

    For the concept of point to point there is a valid "gap" that will be discussed later, but better when LL is without it. It is also possible to use the closing price instead of the bar shadow or to combine them both, but for forex and crypto markets, this is not the best option because these markets are not centralized, and the time of closures may differ (different server time at different brokers), and the quotes themselves, although not
    significantly (due to different liquidity providers with different brokers). For centralized markets and instruments traded on them, i.e. exchanges like CME GROUP, NASDAQ, NYSE, etc. This is normal and quite common.

    One of the most important factors of LL strength is its confirmation locally. For example, one or several points will be from history, and at least one locally. Locally is up to 10 bars without deep bounces off the level. Thus, we exclude grounds for trade only on long-time historical data. Thus, the emphasis is on the current local price behaviour. But this opinion does not matter, for example, on rare breakpoints at the very top and bottom of the graph, it is not necessary for LL local confirmation, but I strongly recommend sticking with them.
    For an initial understanding of what a classic LL looks like at two or more points point to point with and without local confirmation - this is the example (it is ideal).


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    Limit Level types

    There are 5 types of LL. Each has its own characteristics for its location and quality of processing (relatively). The only thing that should be general in them - at least 2 points touch point to point with the allowable size of the backlash. By the way level confirmation (point 2) does not have to be on one side with point 1. But it is still better when they are on the same side.


    1. Classic LL - a fairly rare phenomenon, especially in the forex market, often they can be found in the stock and commodity markets. Easy to define and acts as a very strong entry point. From the first point of this level those. in history, there was a kink in the trend, and it (this point) is an extremum.


    2. Hidden LL - on the contrary one of the most frequent. The difficulty is precisely that it is hidden because, as I said earlier, big business will always try to hide traces of their actions, and to show what others want to see (for example, pin bar price action, or updates of new highs or lows in the trend).
    It is constructed similarly to the classical, from the places of breaking the tendencies, but the points themselves are not sure to be an extremum. This may apply to both point 1 and subsequent tests ie points 2, 3 so and on. Most often, point 1 will be the shadow next to bars before or after the bar that created the extremum itself. It looks like this.




    3. Local LL - appears in the course of price movements, telling us about the appearance of limit orders in the market now, while there is no historical basis. Such LL does not have a good quality of testing and frequency of occurrence, but they have almost always a very small amount of technical stop loss (this will be described separately), on any timeframe, and accordingly, with the minimal risk you can take a relatively huge move, i.e. the risk to reward ratio is more than in any other way. Local LL is built on nearby bars, with at least two touches point to point. These bars can be consistent, for example through one, but locally, without large recoils from the level, and within up to 10 bars.

    4. LL in flats - the most difficult option, but it is very frequent and strong because ranges is exactly the place to set, where large capitals exit from positions because there is not a big price change (within the range). Usually, there are several LL in flats, most often they will be near the boundaries of the flat, sometimes in the middle of it. Therefore, the LL data will most likely combine the first 3 types. You can trade them as in within the framework of trade itself - it’s not difficult, but not very profitable, depending on the width of the range itself, and getting out of it is more difficult, but the profitability is worth it. Here is a great example of all the LL purchases in a flat, while two of them are its boundaries, and one is inside.



    5. Mirror LL - a very frequent occurrence, can also look like any of the first three types and even in the form of a range. The distinctive feature is the presence of a true breakdown of the LL (this will be described separately), and the presence of LL (point 2 and on) on the other hand relatively to point 1. The main advantage of these levels is the ability to use LL for trading not only on the turn but also in the direction of the main trend, which makes it possible take long distances, fix or increase the position in parts. Here are some very successful examples of mirrored LL because at the same time they are in the form of both hidden LL, as local LL, and LL in the flat.



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    "Backlash" when placing LL

    "Backlash" when constructing Limit Levels is the permissible variation relatively to the "point to point" moment. Especially important in the forex market, due to a huge number of participants and the volume of this market. This also applies to tools with a high estimated cost, such as Bitcoin, Gold, stocks like Amazon, Google and similar tools.
    I think many have noticed that the greater the value of the tool, the higher the volatility, so it is impossible to set a specific figure for a "backlash". Even on currency pairs for example for EURUSD deviations in 1-2 points on four signs is normal, and for GBPAUD normal (imperceptible) will be a 3-4 points deviation, if you look at the timeframe from 1D and above of course (timeframes lower in this trading system can be used as addition, but in no case for constructing LL, and not for determining the direction of bidding). Especially with time - this picture may change, because may change the value of the instruments themselves, and their volatility.


    According to this, "backlash" is measured in % of the value of the instrument at a time of the trade, namely 0.02% (up 0.04%) from LL prices. This applies to absolutely all markets and trading instruments. All levels who do not fall under the size of the backlash – are not LL, and are not traded on this system with its rules.
    There is a simpler way to look at the backlash - to make the horizontal lines in your terminal thicker. This should be enough and the scale of the graph will correct the rest itself.

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    General moments regarding setup from Limit Levels

    First of all I want to note that the working timeframe is always senior, i.e. one in which the LL were determined. The optimal is 1D timeframe and only one is more than enough for successful trading within a day, and for the medium term. In this case you can trade limit levels from 1W, 1MN timeframes on 1D timeframe, vice versa is impossible.

    Lower timeframes such as 1H and 15M are only used for more precise inputs, namely, to enter the deal in the most accurate moment in time, not missing it, as well as to avoid the opposite – enter too early. These timeframes should never be used to determine or "fit" LL themselves, because the level should be there - where it should be, and not where it is convenient or seems so. The market does not forgive such mistakes. More details on working with additional timeframes will be in a separate description.
    This trading system implies strictly delayed entries of limit orders Buy Limit and Sell Limit. Given the exact entry points and short stop losses there is a need of an ECN accont type (they are excellent in Roboforex), where there is no limit on the distance for placing orders (Stop Level). It should be possible to place orders wherever you want, even inside a spread. This is a very important point, regardless of the broker you work with. The fact that there is a commission for transactions on such accounts with minimum spreads, absolutely for all tools, does not interfere at all. After all, the lower the spread – the lower the stop loss, and therefore, the final ratio of risk to profits is directly proportional and many times greater. This does not apply to the centralized world stock exchanges (the spread is absent).

    Entry point - the ideal entry point is always the Limit Level itself.
    So, whatever we traded, breakout LL, rebound from LL, false or complex false breakout LL - the entry level will always be the level itself.
    The admission at the entry point is a small gap from the level, so as not to miss the entrance, equal to the same backlash as when building a level. More simple - place orders strictly on LL itself.

    The direction of a trade is determined by finding the prices (closing the last bar on the working timeframe), no “predictions”, everything is clear: above the level (longs), below the level (shorts), since the decision about entering (after a completely formed trade setup).
    For example, if the price came from the bottom up to the LL and the closing of the last day bar, after which the decision to trade was made, is below the level - we trade short.
    Everything else, the type, what is the trend, the shape of bars, patterns, etc., are not the factors in choosing a direction, and do not affect the decisions to trade.

    In general, the global trend, its phase, supply and demand zones, price action patterns, etc. - require a lot of knowledge and skills to work with them, and there are quite a few subjective moments, which accordingly gives a lot differences. This system is built on the opposite moments, just on the specifics. Therefore, if you do not understand this, it is better not to complicate it, because that will only get worse. But if you came to the decision to trade LL only, it is necessary to trade only as this system requires, since it is partly built not just on personal achievements, but also on the "mechanics of the market" .

    After all, the same Pin Bar, in modern trading is very successfully used by large capital for recruiting its position, since it was previously one of the most profitable setups, what I can not say now.
    To sum up in a simple language: the price is below the level - trade short; the price is above the level – trade long, but first there must be a trade setup (enter option).

    Entry options from LL:
    1. Fully-turning - the easiest.
    2. Breakout - entry on a rollback after a true breakdown
    3. Reversible through false breakdown.
    4. Reversible through complex false breakdown.
    5. Breaking through any kind of false breakdown - entry after false, or complex false breakdown, during a rollback, after a true breakdown LL.

    More on these options, their pros and cons, as well as about my personal preferences and their reasons - will be further discussed in details.

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    Key differences and possibilities of using Limit Levels in comparison with the "classic".

    To finally close the question of comparing my approach with the classical interpretation, regarding any levels, we take the first screenshot laid out in this thread and analyze it in detail, with the ensuing options consequences. I must say that a superficial glance on this approach will not be enough, to fully understand and apply it. For example, without a detailed, thoughtful parsing of post # 2 (of theory), it is unlikely that it will turn out.

    To the example.
    First, we look at it as a classic level of support (I’m familiar with different trading methods). The first stop loss (or two, if you look separately) we get after a closing below the level, trading it like a mirrored one during a pullback, the bearish pin bar in front of the level also helps, which is also possible to trade, because it was following the trend.



    We look at the next entry after a complex false breakdown (generally one of the strongest setups in technical analysis), when rolling back to the level. At the same time we have a giant stop loss and in another way, if you cut it, there is every chance to catch it. We are not talking about earnings at this moment at all.


    Lastly, we assume that we did not transfer to breakeven, or we’ve called during this rollback, if the desire to trade this level remains at all. Finally, it happened !!! Only the stop loss remained where it was, and to go out at least 1: 1 I had 3 more bars to wait and be nervous.

    Now take the support area.


    To start with, where do I draw it specifically? Based on personal experience (I trade in zones, but not everything suits me in them), take the narrowest version of the zones, and as a result we get a worse picture also stop first, then breakeven, and then the entrance, but still with a worse risk to profit ratio, because near the zone there is a width, and the input would be at best from its middle, and if by the rules, then even worse - from its upper boundary. Note, I took the narrowest version of the zones, between the closing price and the minimum shadow of the bar that formed this zone, and it was possible to act differently. And there can be several of this options and they will all be true. As a result, we get: stop even more (really reasonable), to a ratio of at least 1: 1 even further. By the way, if in both cases the stop would be below the level, as in some sources say - we still get an additional pair of stop losses, take a look. Again a fact.

    Now we look from the point of view of the Levels Limit

    At first we don’t look at this level at all until point 2 appeared, with touch point to point, which gave us a clear understanding of the presence of a major player in the Limit level ( again - read post # 2 ). By the way note that a little earlier, there was also a sort of test, but it was not a point to the point, but with a puncture level, especially since this is a weekly timeframe, there was about 10 points, and this does not fit into any sort of backlash. That's how we automatically missed the removal of stops with a huge complex false breakdown.
    As a result, immediately after the appearance of the desired point 2, realizing that we have a Limit Level, we see exactly the local price action, and on the first bar there is false breakdown, which gives us the setup to go into a long position (because closing the last bar is above the level) of the price of the LL itself, putting a competent, reasonable on the technical side, stop loss is at the minimum of this false breakdown. In the remainder - you yourself can already calculate how much profit we will have in that place where the classic version (in the best of them) was 1: 1, without taking into account how many stop losses were before that. And if you rewind the graph to the right, then there the price then went way up higher.

    I can cite many such examples, and not only in history, this one was taken from the first screenshot ...

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    Fully-turning setup for entering from LL.

    This method is the easiest , determine the level, put a reversal Limit order on the level itself and the stop loss ... And here is the question - where to put the stop loss ??? As in the classics they say - behind the level. But "behind the level" is a loose concept, and does not satisfy us. It is ok if the LL was hidden, and the stop could be "hidden" behind the extremum near point 1 of LL, but it does not always work out, and the size of the stop loss will be appropriate in rare cases.
    We introduce two concepts of limiting losses: technical stop loss and calculated (mathematical).

    Technical stop loss is based on graphical analysis, the calculated - on math. If the first option is more or less clear, then the second one will be described in detail later, it is not so simple and it should be reasonable and understood.
    So, as to where in this case (respectively, for all fully-turning setups) to put a stop – the only reasonable will be only one option - calculated.



    Advantages of this setup:
    First of all, simplicity – you see the level, put the order, calculate the stop loss (takes about15 seconds) and that's it. Also the main advantage is the almost complete absence of missed inputs.
    Disadvantages:
    First of all, the probability of falling into a false breakdown is very high (especially on forex), which can catch any stop loss. Good if LL is hidden, as in this example, point 2 is hidden, and the false breakdown was already up to full formation of the LL itself, which simplifies a little. But nevertheless this is not always the case. (I don’t select the examples on the charts so as to be as realistic as possible, just opened the first chart in the terminal, and found a suitable setup, even if not the most beautiful. So I do almost always. I think this will be only better)

    Secondly, there is a possibility that the level simply will not keep the price, and this is possible to avoid only by using other setups to enter (more on it later in the topic).
    Thirdly, the calculated stop loss itself will not always be the most minimal in comparison with the technical, although it also happens the other way around. And this difference may be in a few points, but I remind you that profitability is directly proportional to the size of the original stop loss. For example, extra 5 points deprive us of profits in 50 points, with an initial take profit of 1:10.

    Mathematics is exact science, and it is useless to argue with it.

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    Breakdown setup option for LL entry.

    To begin with, I repeat, for me LL is not either support or resistance This is just the exact place where the balance of buyers and sellers is equal, at the time of price interaction with it. This point, the LL level divides the plane into two parts, in one of which we will strictly buy, in the other - strictly sell, and there is no interconnections with support, accurate expressions like "from this level support will unfold", etc.

    So, the breakdown setup is similar to the previous one, simple and is traded similarly, with one exception. The price, on the working timeframe, must break through the level and close behind him, and accordingly the plane of trade and its direction changes. The entry will be carried out exactly from the level during the rollback back to him. The only reasonable stop loss possible with this approach is the calculated.

    Outwardly, it looks like a classic understanding of the mirror level, with the exception of different construction methods with LL, and as a result less likely to get on a complex false breakdown, because where in the classic version will be the moment of entry, in our case (in most) point 2 will only be formed, and the location of the levels can be quite different, especially when it comes to hidden LL, which are the majority on the market.
    Yes, it is important (desirable) that with this setup, there was a confirmation of LL point to point from different sides of the plane. If this is not taken into account, the quality of processing out the LL itself can drop significantly, but the number of inputs on the contrary will be higher. My opinion is - fewer inputs - higher quality. Nevertheless, both options will be correct, and here are their examples (the first that I found)



    Advantages and disadvantages of this setup (in both cases) are the same as with the Fully-turning setup from the previous post. The main disadvantage is a high probability of falling into a false breakdown;
    There are two options: to make a mistake in general, the level did not become "mirror", but was complex false breakdown; or just be hooked on the calculated stop loss.

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    Variants of entries from LL through false breakdowns.

    As in the previous versions, LL divides the graph into two planes, and accordingly we can trade both on a reversal and a breakdown, as described above.
    The only exception is that we will enter only after a false breakdown, or complex false breakdown, and the rest is all the same.
    Simple false breakdown – the shadow crosses the level, without closing the bars on the opposite side.Complex false breakdown - consists of at least two bars (in average of 2-5, depends on the timeframe), while their closings come from different directions of the LL itself. The first bar will be considered as the completion of the formation of the setup, closed on the side of LL, from where the price came.
    After a false breakdown (any) - place a delayed order at the price of LL (the direction of the transaction depends on the plane in which the closure occurred, i.e. above level - long, below level - short), in the calculation of the re-rollback to it. All this happens on the working timeframe, so the inputs at the closing are not taken into account, because the size of the stop loss will be much larger and the whole point in trading LL is lost.
    In some cases, the sequence may be broken: first was a false breakdown (complex false breakdown), then point 2 of the limit Level appeared, as in the example of rebound from LL .

    In such cases, trade is conducted in accordance with this example, i.e. as simple hang up from the level, or we are waiting for one more, for trading as if through a false breakdown.
    Stop loss is placed behind the extremum of a false or a complex false breakdown i.e. it will be a technical breakdown (based on a technical analysis). But quite often the depth of false breakdowns is not small (relatively), so in such cases it is better either to use the calculated stop loss, or not to trade exactly this setup at all.

    Thus a parameter appears - the allowable size of stop loss which tied to the calculated one. Options for its use:
    a) if the technical stop loss is less than the calculated one - set the technical stop;
    b) if the technical stop loss approximately corresponds to the calculated one - set technical;
    c) if the technical stop loss is greater than the calculated one, set the calculated stop loss or do not trade at all (kind of an entry filter for us).

    Complex false breakdown, in most cases, is a stronger setup than a simple false breakdown. Therefore, a simple breakdown occurs first, followed by a complex false breakdown. Why it happens from a mechanical point of view I will describe separately to show it not only from the graphic side, but also from the real.

    Advantages when trading both types of setup:
    1. High quality of processing, in terms of profitable / negative transactions.
    2. Long distances and pace after false breakdowns.
    3. It is possible to put an adequate technical stop loss, which is still better than calculated.
    4. Sometimes the size of the technical stop loss does not exceed 0.1% of the price level, on 1D timeframe (for an example of EURUSD this is an average of 10-15 points), and hence the PL ratio is very high.
    5. Understanding of the setup, giving confidence in the trade, including the validity their possible losses.
    6. The frequency of the setup (especially in the forex market)
    7. More understanding of the major players actions and also your own decisions.
    Disadvantages:
    1. Quite a lot of missing entries, because there is not always a rollback to LL, after the completion of the formation of the setup, and entering by the market is not an option, because of the stop loss size
    2. The size of the technical stop loss is very often more than acceptable, and you have to use the calculated one, which can be false during a rollback, or decide to skip the entry completely.
    3. It is not uncommon that a false breakdown of a false breakdown occurs and you have to enter again, while having already lost a small amount.
    And now the examples of the main scenarios of both complex false breakdowns and simple, as well as a false breakdown during the rollback, after the true breakdown LL.





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    Last edited by Gulfstream; 06-02-2019 at 02:32 PM.

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