A simple price action approach

[NoDoji]

Quote from dv4632:

In chart5 I passed on the long. For basically the same reasons as chart4, but also in part because I thought it might be "too late" to keep playing that channel. I would have been stopped if I took the trade. 2 bars later, a wick dipped 2 ticks below the low of that red bar second from the right edge. That's where my stop would have been. After that, though, price rallied and made it to the upper channel line target.

So I would've been stopped both long and short? :eek:

dv, this is what I did every day for many many months (and still do several days a week), taking notes every step of the way. It's the best way to develop a trading plan and rules for trade management, which then takes the emotion out of trading and makes it a pure probability play. You trade the setups, limit the losses, reverse when indicated and make sure the reasonable profit targets provide enough to make the risk worth it.

Since I trade almost all my daily setups now, what I do for my post-market analysis is I scroll my chart deep into the session I don't trade (for me that would be from midnight until about 5:30 am PST) and see how the session would play out by my rules.

This exercise every day will make you a great trader. You'll see how well PA trading can work and it will give you more confidence. Your confidence keeps you trading, which generates more profits, which keeps your confidence level high.

 

[PABuster]

Quote from NoDoji:

That last bar is small, meaning low risk stop placement, so I'd go long and look to reverse short a break of the previous bar's low.

The problem with this long is its the 4th test of the upchannel. Typically I personally try to avoid areas that has more than one test.

Buster

 

[dv4632]

Yeah, you'd have been stopped on the long and on a stop-and-reverse short as well. A doji bar with long wicks on both ends was the culprit. Though I suppose you could still have re-entered long again?

Yes, I'm long a break of the second to last bar's high with a profit target being a break of the previous high. As much as I'd like to hold for move to the upper channel line, the last high didn't make it that far, so I'd be watching closely to see if there was increasing buying strength on the breakout and if not I'd be ready to take profit quickly if the break fizzled

--

If price tests previous R, watch very carefully for a stop run. Since a break of previous R would appear to take price right into the upper channel line, you want to see previous R break with conviction or take your profits quickly. A failed b/o would indicate a stop run

In both these cases you would be taking profits quickly, and not holding for the channel line target. Do you have any general rules on what "quickly" means? Like a break of a previous bars low? Or a faster exit where you are exiting after you see a wick or two appear at the R level?

I'm probably getting ahead of myself by asking about finessing exits. I'm just trying to learn how to spot channels/TLs in real time. But had to ask.

 

[NoDoji]

Quote from dv4632:

Yeah, you'd have been stopped on the long and on a stop-and-reverse short as well. A doji bar with long wicks on both ends was the culprit. Though I suppose you could still have re-entered long again?

Yes, I'd likely re-enter long again, assuming the classic Al Brooks' "failed failure" setup would cover my losses

Quote from dv4632:

In both these cases you would be taking profits quickly, and not holding for the channel line target. Do you have any general rules on what "quickly" means?

I do have a very specific definition of "quickly" when a next key level in line fails to break with conviction. What I do if a level break is weak is I trail my stop a couple ticks back inside the breakout level to lock in my profit at that point. When a breakout of a level is very weak, a retrace back inside the breakout level is not a good sign for continuation in the direction of the break. I sometimes get faked out of trades that continue further my way, but more often I save myself from giving back much or all of my profit.

 

[NoDoji]

Quote from dv4632:

I'm probably getting ahead of myself by asking about finessing exits.

There's no such thing. One trade you'll finesse an exit and get out a tick or two from a turning point and believe you've now become a trading god; then later you do the same thing and leave 20 or more ticks on the table.

The key to keeping your trading ego in prime condition is to make sure the perfect finessed exit occurs at the end of the day, preferably Friday so you have all weekend to thump your chest

 

[nakachalet]

Quote from NoDoji:

There's no such thing. One trade you'll finesse an exit and get out a tick or two from a turning point and believe you've now become a trading god; then later you do the same thing and leave 20 or more ticks on the table.

The key to keeping your trading ego in prime condition is to make sure the perfect finessed exit occurs at the end of the day, preferably Friday so you have all weekend to thump your chest

there are also those who only trade 4 days/week because of their preferred shabbat shalom celebration, may they thump their chests at the close of the exchange on thursday instead....? LOL

you have a very good point there nodoji.

in the same line of thought, many readers here will begin to wonder.... nodoji said that--One trade you'll finesse an exit and get out a tick or two from a turning point and believe you've now become a trading god; then later you do the same thing and leave 20 or more ticks on the table....

how then could there be so many so called guru or system specialists hogging their claims and wares out there.... that their trading systems would make money for unsuspecting buyers....?

 

[dv4632]

Quote from NoDoji:

I do have a very specific definition of "quickly" when a next key level in line fails to break with conviction. What I do if a level break is weak is I trail my stop a couple ticks back inside the breakout level to lock in my profit at that point. When a breakout of a level is very weak, a retrace back inside the breakout level is not a good sign for continuation in the direction of the break. I sometimes get faked out of trades that continue further my way, but more often I save myself from giving back much or all of my profit.

Ok, so once price breaks the level in question it should not dip back inside that level by more than a couple of ticks. Is that right?

But what if price breaks out above a level then pulls back 4 ticks below it, triggering your stop? So you're now out of the trade. Would you look to re-enter long again if price went back above the level? Or back above the high of the bar that triggered your stop? Because potentially R could still be becoming S, just with a slightly deeper retracement than you expected.

 

[dv4632]

Here's another.

I got the long entry at 3am off the purple channel.

I went long again at 4:30. Stopped out and reversed to short. Only got a breakeven trade on the short.

I didn't pick up on the short after 6am. I didn't think to draw that channel until price already started to react down. My bad on that one. It would have stopped me out but it was still a valid trade that I should have seen.

On these last two trades, what would have been the proper exit? On the first one I was stopped back at breakeven. Had I taken the second, I would have stopped for a small gain on the way back up off what would become the white TL. I stopped out at 1.417 when price took out those 4 highs to the left.

At the right edge of the chart is a potential long entry. Price was never able to make it back to the bottom rail of the yellow down channel, so I drew in a white uptrend to monitor. Price has just tested the white uptrend a second time and given me an entry trigger. In at 1.4169 when price took out the high of the third bar from the right edge and a stop a tick below the 1.4161 low.

But, the last bar on the right went down and got my stop and reversed back up. As that bar is reversing back up I still want to consider a long, even though there's a double top to the left. But now I would enter if the high of the second bar from the right is taken out, not the third. So an entry at 1.4173 (instead of 1.4169) and a stop at 1.4160. The double top is at 1.4182 so I need to be aware of that, if that level breaks and price retraces below it, I'd have to get out. But the nagging though here is that I'm risking 13 ticks with possible R only 9 ticks away. Should I just forget the trade?

 

[NoDoji]

Quote from dv4632:

Ok, so once price breaks the level in question it should not dip back inside that level by more than a couple of ticks. Is that right?

But what if price breaks out above a level then pulls back 4 ticks below it, triggering your stop? So you're now out of the trade. Would you look to re-enter long again if price went back above the level? Or back above the high of the bar that triggered your stop? Because potentially R could still be becoming S, just with a slightly deeper retracement than you expected.

There are two aspects to a breakout: 1) the strength of the initial break, and 2) what price does after the initial break.

In the instrument I trade, CL, (and I noticed this in 6E as well), price should break a key level (previous H/L, shelf/floor of a triangle formation, TL of a flag) with conviction (8 or more ticks on the initial break), and price shouldn't retrace very far (if at all) inside the breakout level. This is why on any breakout trade (including the break of a large price bar), I use a 10-tick initial stop and I tighten it rather quickly.

If I'm stopped out and then price takes off without me, c'est la vie, I'll just wait and trade the pullback. There may be an opportunity to re-enter, but in the heat of battle, it's not that easy to maintain the calm rationality and quick reaction time needed to do this. You have to really think and react fast because the price action around a breakout is volatile, whether the breakout is successful or fails. I've seen price appear to fail (break 2-3 ticks and retrace a few ticks inside and hang there for a moment) which easily shakes me out, then take off 20 or more ticks before pausing. And I've seen a failure where I scratch the trade, contemplate the fact that the breakout failed and before I can put on a reversed position, price reverses 20 or more ticks.

I would guess that my ability to stop and reverse during volatile price action around breakouts is a little over 30% at this point. I do practice being prepared though, so that should improve with time. I'll talk to myself out loud describing what needs to happen and what to do if it doesn't. This helps a LOT for reversing sides quickly on failures. So let's say I position long off the LTL of an ascending triangle when price range has narrowed significantly and the breakout of the resistance shelf is closing in. I'll be talking out loud, ".70 reverse .59, .70 reverse .59..." meaning if the breakout doesn't hit at least XX.70, then I want to stop out b/e and place a sell stop @ XX.59.

You have to know your instrument well to come up with particular rules for trade management that work more often than not, which is what it's all about. If I'm trading oil or euro, my tactics are about the same; ES on the other hand commonly breaks, retraces back inside the breakout level, then continues in the direction of the break, so I'll either position myself early if possible, or wait and be the second mouse.

 

[NoDoji]

Quote from dv4632:

I went long again at 4:30. Stopped out and reversed to short. Only got a breakeven trade on the short.

I didn't pick up on the short after 6am. I didn't think to draw that channel until price already started to react down. My bad on that one. It would have stopped me out but it was still a valid trade that I should have seen.

On these last two trades, what would have been the proper exit? On the first one I was stopped back at breakeven. Had I taken the second, I would have stopped for a small gain on the way back up off what would become the white TL. I stopped out at 1.417 when price took out those 4 highs to the left.

On the short where you got b/e, here's how I manage such a trade. It's the first reversal move following the channeling uptrend, so you watch price react to each potential profit target level. First you want to see price break the previous pivot low around 4:30, which it does.

Then you watch for a break of the pivot lows a little after 1am and also at 3 am, which happens, but there's more testing of waters by the bulls (notice the 5am hammer that tries to break upside before resuming down). This would lead me to move my stop to b/e.

The next S to be tested is the shallow pullback low after midnight just above the 1.4140 level. This doesn't break, it holds slightly higher. I'm taking full profit right there or, if trading multiple lots, I'm taking off half.

If I shorted off that triple failure to break the upper channel (and previous R), my target for price support would be the 20 EMA, so IF I took the short trade there, I'd move my stop to b/e when price hit the 20 EMA and watch to see how price reacts to each previous S level. If price couldn't take out that pivot low at 6:00am for example, I'd take off at least part of the position for a scalp.

If price failed to move lower, I'd wait for a close above the 20 EMA and look for a long entry.

Quote from dv4632:

At the right edge of the chart is a potential long entry. Price was never able to make it back to the bottom rail of the yellow down channel, so I drew in a white uptrend to monitor. Price has just tested the white uptrend a second time and given me an entry trigger. In at 1.4169 when price took out the high of the third bar from the right edge and a stop a tick below the 1.4161 low.

But, the last bar on the right went down and got my stop and reversed back up. As that bar is reversing back up I still want to consider a long, even though there's a double top to the left. But now I would enter if the high of the second bar from the right is taken out, not the third. So an entry at 1.4173 (instead of 1.4169) and a stop at 1.4160. The double top is at 1.4182 so I need to be aware of that, if that level breaks and price retraces below it, I'd have to get out. But the nagging though here is that I'm risking 13 ticks with possible R only 9 ticks away. Should I just forget the trade?

The way to avoid getting chopped there is to wait for a confirmation setup.

Here are the problems with the setup leading into the upside break at the HRE:

1. You have internal double top resistance at a lower high (6:30 and 8:00am)

2. Price dipped below the 20 EMA in between, which results in a flat 20 EMA. My trading rules for the 5-min chart only allow very specific setups to be traded around a flat 20 EMA on the 5-min chart. I may "fly fish" and position myself either direction off the 1-min chart if it's setting up cleanly, but more often than not I wait for clarity.

3. Price dipped below the LTL twice. (An early bird long via a break of the high of the little red hammer that initially overshot the LTL gives you a chance to scratch the trade for a tiny loss or b/e when price breaks the 20 and the bar break that took you into the trade fails to hold as S.)

Because of these conflicting factors you want to wait for a close above the 20 EMA and a retest of the pivot bar break (that little red hammer). In uncertain PA like this, price almost always retests the pullback bar break level.

In fact, you may have shorted the break of the second to last bar (also the LTL break). I would have.

When price breaks the twin bottom support of the 3rd and 4th bar back by only a tick or two, you move your stop on any short positions to b/e, and look to go long a break back up through the 20 EMA. It's a perfect bear trap and should fuel a good move up to test that previous double top R.