Yearly Archives: 2013

Expecting a Breakout Failure

I recently posted the following image on the YourTradingCoach Facebook page.

For the sake of this article, ignore the text in the yellow box.

Actually… don't ignore it… put it aside for now but do think about it later. It's incredibly important and may well reveal to you the real essence of trading psychology.

But for the sake of this article, let's focus on the trade.

The facebook post generated the following comment from a reader:

There is no reason to buy till I can recognize a changeover of power!

This is an absolutely valid comment given the lack of context provided in the facebook image, as touched upon in my reply:

This chart is missing all the wider context that comes from HTF and earlier TTF price action. Any discussion of long vs short vs stand aside is not really possible just from this small snapshot of data. The point of the post though was not the trade, but the text regarding fear and trading psychology. (There was good reason to go long though!)

So let's look at the trade in a little more detail.

It's important, because it reveals a different way of thinking that doesn't necessarily require you to wait for a clear and definitive "changeover of power".

First let's look at the higher timeframe S/R framework:

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Reviewing Key Price Action Sequences

A great way to learn to read price action is to review your historical price charts, with a focus on the price action at key structural locations.

Find and review anything which fits these categories.

  • tests of significant levels
  • breaks of significant levels
  • traps
  • transitions between trends and ranges
  • transitions from volatility contraction to expansion
  • and in fact anything else that stands out on the chart

 

Each day, identify a key price sequence.

Study it and learn.

It only takes a minute.

Let's look at an example in which Crude Oil breaks higher in Monday's session, into layered levels of range resistance, before falling back into the range.

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A Failed Break of a Range will lead to a Test of the Other Side

Here's a great email question from a reader:

Question:

I'd like to get your opinion about a question I saw on a forum. To be honest I wonder if there is a proper answer but nevertheless I think this behaviour occurs often. It is a form of strong rejection at an extreme of a range leading to the other extreme. Is it just a form of self-fulfilling prophecy?

I'm curious why when a trading range is violated, then rejected and comes back into acceptance (or previous range) does it usually go to the extreme other side of the range? Just curious what would be the thinking behind what is going on behind that action.

Response:

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Grinding Channel Break

Email Question:

I'm not quite sure how to manage this situation. My initial thoughts are that shorts will enter on a break below the channel, and that they will realize that they are wrong if price breaks above the last candle. On the other hand, there is weakness in the uptrend which would set my expectations for a CPB instead of entering on this single-leg PB.

Would you see this as a valid long opportunity?

Also, given the choppy price action, there isn't a clear swing low to determine a change of trend to downtrend if price were to break lower.

I'm sure it's mostly subjective, but where is the point when you would change your bias to bearish (given acceptance below the level)?

Response:

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Wait for the Fakeout

A common complaint I hear from traders is "the broker ran my stop!"

Here's the thing though… it's usually not your broker.

It's your failure to properly recognise the real nature of price movement.

The nature of the markets is one of tests, retests and probes of prior levels.

If you've developed a belief about the markets that does not allow for this you can't complain when your belief is found deficient!

This is the reality.

Expect price to test liquidity beyond a price level.

And adjust your plan to allow for this.

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Learning – When the Markets are Closed

Even when markets are closed there is great potential to improve as a trader.

Here are a few options, aside from the obvious which is reading trading books (especially this one).

Market Replay – Missed Sessions

We discussed market replay previously (see here).

This is by far the greatest tool available to you for after hours learning.

Here's one way you can use market replay to improve your skills…

I don't like to ever miss a trading session. Sometimes though, life gets in the way and it's unavoidable. This is where market replay helps me out. Later, when time comes available, that session is replayed as if live.

Last week I missed Friday's session. My family and I had to depart early on Saturday morning to travel several hours for a family function later that day. Given that my timezone (Australian east coast, UTC+10) means that Friday's session commences at midnight Friday night, I made the decision that it's wise to miss this session. Travel is never fun after only an hour or two of sleep… plus it's just not safe.

On return home late Sunday, after the family was in bed, I replayed the opening hour from Friday nights emini Russell session.

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Long at Support

In last week's article we saw a buy in Crude Oil as it tested support.

Check out the article here if you missed it.

Today we examine a very similar setup in the emini Russell.

In this session I was trading with the following timeframe combinations: HTF 5 min, TTF 1 min, LTF 15 sec / 2-range

As always, please note that the timeframes are not important. It's the concepts that we're looking for. If you trade higher timeframes you should simply scale upwards accordingly.

Let's start by looking at the higher timeframe structure at the time of session open. We're looking here at the HTF 5-min chart showing session data only.

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Buy because there are No More Sellers

From last weeks article (Return to First Principles)…

  • You must aim to BUY at areas where you know others will buy after you, because their buying will create the net orderflow or bullish pressure to drive prices higher, allowing you opportunity to profit.

  • You must aim to SELL at areas where you know others will sell after you, because their selling will create the net orderflow or bearish pressure to drive prices lower, allowing you opportunity to profit.

Or from the opposite perspective, this would be…

  • BUY because there are no more sellers.

  • SELL because there are no more buyers.

Let's look at a trade example.

buy because there are no more sellers

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Price Action Principles – Timeframe Independent

I just want to take the opportunity here to remind those on higher timeframes that almost everything I write should be thought of as largely timeframe independent.

Most of the examples I provide will come from very low timeframe charts. Why? Because that’s what I trade!

But while the chart images I show in newsletter articles may be from a timeframe that is vastly different from your own trading business, this does not mean there is not value in my writing.

Look beyond the charts to find the ideas, concepts or principles that are relevant to price action traders across all timeframes.

It’s about the principles… it’s not about the timeframe!

The YTC Price Action Trader analysis and trading plan is adaptable to all markets and all timeframes.

The YTC Newsletter articles also have application across all markets and all timeframes.

You just need to think a little to see where it may fit within your own business plan.

We’ve talked higher timeframes on occasion… both through my own examples and through those provided by readers:

But this is clearly not evident to all traders.

Following last weeks article on the first pullback following a structural change, I received a notice of an “unsubscribe” from one trader, who stated the following: “I am into end of day trading. Each week you seem to start off with a 1 minute chart and that is not for me… thanks”.

I have no problems with unsubscribes. I’m happy for people to leave if they’re not getting value or not liking my writing style. But to leave because the timeframe is different to your own… it’s just a shame they couldn’t see the principles beyond the chart. The first pullback following structural change is a concept relevant to all markets and all timeframes.

Interestingly, I also got two emails from other traders discussing higher timeframes. Both these guys get it!

First from RL.

G’day Lance,

Its been a few years since I emailed you, but I continue to read and learn from your weekly updates. Thanks again for taking the time to do that.

I am a longer term trend trader, so I use the weekly charts for my trend identification and the daily for entries. I was reviewing my entries this past Friday morning in the States (before I got your email), and noticed once again that the 1st pullback after a breakout is really the best place for me to enter a trade.

I use stochastics to help identify the pullbacks as my brain tends to get overloaded just looking at a price chart, but that’s just me. I also like pullbacks to the major moving averages (like the 50D), knowing that many traders are looking at this too.

I was excited when I saw your email later in the day about the 1st pullback after a “structure change”. For me, a structure change is something like a Higher High or a new 20D High. And on many of those situations, I now realize that trading the breakout isn’t the optimal play, but waiting for that 1st pullback (if it happens) is really the highest return for $ risk I can make.

I thought it was great that you would write about this on the same day that I re-discovered it and (perhaps) will finally accept it and build it into my trading plan.

Hope all is well, and happy trading

RL

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It's about the principles... not the timeframe

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