How do you deal with false signals and whipsaws when using brick charts?

1 What are brick charts?

Brick charts are different from the conventional candlestick or bar charts, because they do not use time as the horizontal axis. Instead, they only show price changes that exceed a certain threshold, called the brick size. Each brick represents a fixed amount of price movement, regardless of how long it takes to form. When the price moves up or down by the brick size, a new brick is added in the same or opposite direction of the previous one. The color of the bricks alternates between green and red, indicating bullish and bearish trends.

2 How to scalp with brick charts?

Scalping is a short-term trading strategy that involves taking small profits from frequent trades, usually lasting from seconds to minutes. Scalpers use brick charts to identify the direction and strength of the trend, and enter and exit the market accordingly. A common scalping technique is to follow the bricks and trade in the same direction as the current color. For example, if the bricks are green, the scalper will buy and sell when a new green brick is formed. The scalper will also set a tight stop-loss and take-profit level, based on the brick size or a multiple of it.

3 How to swing trade with brick charts?

Swing trading is a medium-term trading strategy that involves holding positions for days or weeks, aiming to capture larger price movements. Swing traders use brick charts to spot the major trend reversals and breakouts, and adjust their positions accordingly. A common swing trading technique is to use the bricks and moving averages to confirm the trend change and signal the entry and exit points. For example, if the bricks cross above a moving average, the swing trader will buy and hold until the bricks cross below it. The swing trader will also set a wider stop-loss and take-profit level, based on the support and resistance levels or a percentage of the profit.

4 How to deal with false signals and whipsaws?

False signals and whipsaws are the main challenges of using brick charts, especially in volatile or sideways markets. A false signal is when the bricks change color but the trend does not reverse, resulting in a loss; a whipsaw is when the bricks change color back and forth, generating multiple false signals and losses. To minimize these issues, traders should apply filters and rules such as using a larger brick size to reduce the noise and increase the reliability of the signals, incorporating other indicators or tools like trend lines or price action patterns to confirm the signals and identify market conditions, implementing a trailing stop-loss or partial profit-taking strategy to protect profits and limit losses, and waiting for a confirmation brick or pullback before entering or exiting the market to avoid catching the tail end of a move or missing a better opportunity.

5 How to choose the best brick size?

The brick size is a critical factor for the performance of brick charts, as it affects the sensitivity and smoothness of the charts and the number of signals and opportunities they generate. Finding the optimal brick size depends on the trader's style, objectives, risk tolerance, and market conditions, but there are some general guidelines that can help. For scalping, use a smaller brick size that matches the time frame and expected profit target. To adapt to changing price movements, base the brick size on a percentage of the average true range (ATR) or volatility of the market. Additionally, ensure it is consistent with historical price patterns and levels, and not too small or too large to avoid missing significant trends or generating false signals.