Well, let's look more into a specific instance to develop a more comprehensive theory. For example, a failed breakout occurs where a green candle tip breaks through a resistance level, however a full candle does not form and instead price falls back under the resistance level with a full red candle forming below the resistance level.
This is a basic failed breakout. Using another indicator one could then have more technical bias to place the short. At this time the reason for price to continue to move in the direction of our trade would be that the longs who were long the break out are now trapped. As they get stopped out, the downside movement is sustained.
As you rightly point out we don't know when or where the downside movement will finally come to rest and possibly reverse. However, in most instances it will travel back down to the 1st support level.
Now we also know these trades do not have a 100% win ratio. So to control our risk and make a profit over time we can initiate the following trade management rules of your choice depending on your trading plan.
Trade Management (note you can pick any one of these to use):
1) You could use a rising stop loss that is brought up while you are in the trade.
2) You could go for a double reward vs risk but tailored to the chart. For example, if price never made it past the low of the day, you may want to decrease your target to stay within that range.
3) Look at %. If your win rate is 65% or higher, then an even risk vs reward is fine. So when using even risk vs reward we can then target the 1st support level and then when hit, we can be done with the trade.
4) You could be using multiple contracts where you take some off or add some to the trade like Ammo does in his ES trading. As the trade goes against him he might average in, and then if it continues to go against him he might take some off to add back on later. For him adding contracts to a losing trade works since his win rate is higher and averaging in maintains his higher win rate. Personally, if I know I got in at the right point and did not make a mistake I don't want to change my stop location or add more contracts. However, if price approaches your stop location and you add another contract, you could still take both off at this location.
This is a basic failed breakout. Using another indicator one could then have more technical bias to place the short. At this time the reason for price to continue to move in the direction of our trade would be that the longs who were long the break out are now trapped. As they get stopped out, the downside movement is sustained.
As you rightly point out we don't know when or where the downside movement will finally come to rest and possibly reverse. However, in most instances it will travel back down to the 1st support level.
Now we also know these trades do not have a 100% win ratio. So to control our risk and make a profit over time we can initiate the following trade management rules of your choice depending on your trading plan.
Trade Management (note you can pick any one of these to use):
1) You could use a rising stop loss that is brought up while you are in the trade.
2) You could go for a double reward vs risk but tailored to the chart. For example, if price never made it past the low of the day, you may want to decrease your target to stay within that range.
3) Look at %. If your win rate is 65% or higher, then an even risk vs reward is fine. So when using even risk vs reward we can then target the 1st support level and then when hit, we can be done with the trade.
4) You could be using multiple contracts where you take some off or add some to the trade like Ammo does in his ES trading. As the trade goes against him he might average in, and then if it continues to go against him he might take some off to add back on later. For him adding contracts to a losing trade works since his win rate is higher and averaging in maintains his higher win rate. Personally, if I know I got in at the right point and did not make a mistake I don't want to change my stop location or add more contracts. However, if price approaches your stop location and you add another contract, you could still take both off at this location.
