Category Archives: Trading Process and Strategy
Trading Process and Strategy – In this category we discuss all aspects of the trading process, including: (a) Technical analysis, (b) Trade Strategy, (c) Identification of trade opportunity, (d) Trade entry, (e) Trade management and exit.
REFERENCE: Definition of a sideways trend – Vol 2, Ch 3, Pages 99-102
Not all trade setups are equal.
You need to collect and review your stats to determine which setups provide your A+ MUST-NOT-MISS potential opportunity of the day.
For me, the first pullback in a NEW directional trend is one of these MUST-NOT-MISS setups.
No, they do not always profit. And sometimes they offer profits, but I mismanage the opportunity.
But when they do run and I perform well enough to catch them, the profits can more than make up for any other failed attempts. As always, we profit over a series of trades. Individual trades are irrelevant.
Check your own charts, in your own market and timeframes. Note any sideways trend environments. Find a breakout which occurs with some strength, which holds the break. And see if you can also find edge on the first pullback into this new directional trend.
I want to write a short followup to last week's article – First Pullback After Significant Structural Change.
Email feedback during the week made it clear to me that some information which I'd assumed was obvious, was not actually obvious to all readers.
And as with most assumptions, it's actually INCREDIBLY IMPORTANT.
The article dealt with a trade taken well after my usual "stop trading" time of 12:00ET. This is normally time for my post-trading routines before heading off to bed.
But on this day I wasn't tired, so I went on with other work while keeping one eye on the markets. Not with any real intent to trade. Just to follow along. Unless of course an A+ trade opportunity came along, screaming out to be traded, and then it's game on.
So here's what happened (from a higher timeframe chart perspective)…
If you want to see the trade, check out the original article – First Pullback After Significant Structural Change.
So this led to a reader asking why I didn't trade LONG from the obvious level of support?
My error last week was in approaching the trade and surrounding context purely from the technical charting perspective.
1. Obvious structure.
2. Break from obvious structure.
3. Trade the first pullback.
I didn't sufficiently explain the underlying reason WHY I consider this an A+ opportunity. And why opportunity LONG from the obvious level of support was something I was happy to pass on.
An excerpt from my response:
I think the cause of the misunderstanding here is that you're failing to appreciate how little I wanted to be trading. My trading was over. I had almost zero interest in trading. I had better things to be doing. UNLESS something absolutely amazing set up.
So yes, had I been trading from 12:00 I would have been seeking entry LONG, as you've suggested. Price held that level nicely.
But this is not the kind of action I want to take after a trading session is over. Can you see the difference between the two sequences? The sequence from 12:00 to 15:00 is just a continuation of the earlier session bias. But the move after support was broken is different. Suddenly A WHOLE LOT of traders are wrong. Everyone who is still holding a longer-term long position, established at any time in the last 3 hours, is suddenly in a drawdown. This is the kind of action I want to trade. Something that traps a whole lot of people. Something that shocks the market. Otherwise, I'll pass.
The break of support is something which SHOCKS the market.
Something that results in a massive increase in emotion.
Viewing charts from the perspective and emotion of "the other trader" is the key premise underlying my whole trading approach in the YTC Price Action Trader. Outlined in Chapter Two and then evident in the whole analysis and trade process.
The same applies with every trade you see within my newsletter and blog posts. Even, as in the case of last week's article, where the discussion focused solely on the technical aspects of charting. Look to my charts from the perspective of "the other trader". It will be there somewhere.
I don't often trade after midday Eastern Time. It's the middle of the night here and I'd much prefer to get some sleep.
But from time to time I'm alert and awake and there is no chance I'd be able to sleep even if I tried.
So I'll complete some of my post-session review and then go on with other work, while keeping an eye on the markets.
The default intent is to NOT trade… unless it's screaming out to be traded.
What does that look like?
Here's one example. A trade that is so damn obvious I would have been kicking myself if I missed it.
It's a YTC PB trade. But what is important is not so much the trade itself, but WHERE it happens in the "bigger picture" market structure.
Dropping down to the Trading Timeframe to see the outcome:
2. Break of structure.
3. First pullback against the break of structure.
It's no Holy Grail. Sometimes there will be losses. And sometimes you'll miss the trade.
But it's opportunity I do NOT want to miss.
Let's look at a tool that can help you manage the conflict between what you FEEL should be happening and what you SEE is actually happening. Particularly for those of us who prefer clean charts with price only.
Here is the NASDAQ 5 minute chart from Monday 4th March 2019.
You can't get an indication of how bearish it was due to the scale on the RHS being quite compressed.
This was a REALLY nice move.
But the day after I had some email discussion with a trader who was beating himself up over missed opportunity.
In his words…
Yep… we've all been there… sitting on the sidelines while we watch the market go on without us. Can't go short because you FEEL it will rally any moment. But can't go long because you SEE it just keep falling.
The old saying comes to mind… "trade what you see, not what you think".
But like all of these simplistic truths, they're much tougher to put into practice than you'd imagine.
My immediate thoughts – don't beat yourself up. Ever.
Or if you feel it's warranted, then allocate a few minutes to let it all out. And then move on.
Today is just one out of thousands of trading days you'll have over your career. Take the hit. Learn from it. Move on.
And really… at least you didn't try to fade the move all the way down. It could have been a whole lot worse.
(NOTE: He actually profited on the day. All the anger and regret were simply because he knew he could have got a lot more.)
So we discussed a few issues.
Missing the initial short was a key part of the problem. This then triggered a shift to "outcome thinking" rather than "process thinking"; not wanting to make a bad situation worse by following up a missed opportunity with a losing trade.
As soon as you fear losing on a trade, it's game over.
So this is an issue he will work on, recognising now that missed opportunity can be a trigger that shifts his mindset away from productive thought processes.
But that is not the point of this article.
Because it provides a technical solution to another key part of his problem.
Something that could have provided confidence in entering and holding a short position while he sees that the market keeps moving lower, despite his bullish internal bias.
In other words… he needed a guard rail.
(NOTE: We're going to leave out discussion of S/R, which may have also helped. The trader does not use an S/R framework at all, instead trading the trend structure.)
The Guard Rail is a concept that was discussed in part 2 of the article series.
Think of this:
The primary purpose of the guard rail is to prevent (or limit) damage should you veer off the road.
But it also provides a secondary function. It allows you increased CONFIDENCE in driving along the road without fear of falling over the edge of the cliff.
Can we achieve the same on our charts?
I think we can (to some degree).
Give it a try next time you find conflict between what you feel should be happening, and what you objectively see is actually happening.
Add a guard rail to the chart. Let it act as a clear line in the sand, dividing the chart into two zones. One side allowing you trade what you see is happening. The other allowing you to trade what you feel (and hopefully by then also see) is happening.
Lesson 1: When two trade ideas fail to work, consider a break. When three trade ideas fail to work, force a break.
Lesson 2: When the pullback is deeper and stronger than expected, let it roll over. Get in on the other side.
Lesson 3: An exit is not necessarily final. Remain focused and consider re-entry if the premise is proven to still be valid.
My normal trading times are between 09:30am and 12:00 midday US Eastern Time. You won't see many trades after midday because in my timezone that is 3:00am. It's time to complete my post-trading routine before getting some well deserved rest.
But occasionally circumstances allow me to push a little beyond this midday (3:00am) time limit.
This occurs ONLY in those times when (a) I'm feeling wide awake and alert, (b) the market is directional with smooth price flow, and (c) something is screaming out to be traded.
So that raises a good question. What exactly is something that is screaming out to be traded? Unfortunately that's difficult to define. Essentially it's a feeling. Let me explain.
The default option is to stand aside. Most setups I just leave alone. I'd rather get on with my post-trading routine.
But from time to time the market sets up in such a way that I just KNOW… I have to be in this trade. This one is so good. It's an A+ trade. An edge that is so obvious that I'd be a fool to miss it.
A trade which I'd rather enter and take a loss than miss the opportunity entirely.
Think carefully about that last statement if you're new to trading!
From a technical perspective though, they will almost always involve a trap of some kind.
You need to sense the blood in the water. Someone, somewhere, has got themselves caught. There is pain. There is emotion. And for me… there is opportunity.
Today… we get to see one of these trades.
A trap on a retest of a level. A setup that was screaming out to be traded.
NOTE: Complex pullbacks plus the strength/weakness analysis used in this example are all covered in the YTC Price Action Trader.
I don't care how good your analysis is. There are NEVER any certainties that a target will be hit.
So let's look at a little technique which can help your decision making during both the trade planning and trade management phases.
This article idea was prompted by some great email Q&A I received recently.
Let's start with the email question and response. I'll then expand upon part of my reply, as I think it's an important topic that deserves further discussion.
The email included a 30-minute Higher Timeframe chart. It's not reproduced here. It's sufficient to know that the higher timeframe is in an uptrend.
The following is the 3-minute Trading Timeframe chart showing the prior day in the left half and the current day to the right.
Click on the image if you want to open a larger copy in your browser… or just skip down lower to where I've zoomed in to the current session.
Let's zoom in now to show just the current session:
The question is quite clear from the text on the image, but just to be sure I'll include the email text as well:
As per chart on 17th I was long on the days range low also the price was above the previous day close. So decided to go long on range low (865 with sl 862) as the major trend in 30min was in up trend. So I was right in my analysis however and kept my position open even though price hit the range high of the day with the expectation of reaching the target of 874. However it didn't went as per the expected and my SL got hit and post my SL hit , price went till 875 and hit achieved my TGT. Sir if I m wrong and my SL get hit I can understand that, however if I m right and my SL space is right and my Sl get hit and post that TGT is achieved . How to handle these kind of situation?
SO HERE'S THE SITUATION:
I must say… I love the trade entry. From a YTC perspective it's aBOF of the low of day support, coinciding with the prior day's high resistance, in the direction of a longer-term uptrend.
Very nice trade idea!
The following was my response:
You ask, "How to handle this kind of situation?"
There is no "situation" here. What has happened is completely normal in the markets. The nature of price is that it often involves tests, retests, probes, spikes and all manner of action that traps people and stops them out before going on to the target. This is completely common.
How I would handle it (accepting that this is hindsight analysis and I didn't actually trade this market):
(a) The market on this trading timeframe is ranging. You entered beautifully. But I would have taken at least partial profits at the range high. It's the nature of ranging markets that they will continue to range, until orderflow triggers the breakout. There are no certainties in the market. So while you identified a good target much higher than the upper range boundary, surely you MUST have in mind the potential for the range resistance to hold. In that case, take part of the position off.
(b) And then being stopped out on the remainder, why did you not get back in? There's a beautiful re-entry just after 14:00.
Look back through my site. There are numerous articles along the theme of sometimes trades take multiple attempts. Here's one of the recent ones – http://yourtradingcoach.com/trader/how-i-think-on-trade-exit/
Sometimes a trade takes two attempts!
LET'S EXPAND UPON ONE KEY POINT
This is the point of today's article.
As mentioned earlier… I don't care how good your analysis is. There are NEVER any certainties that a target will be hit.
So here's a little tip which can improve your decision making regarding targets. After selecting your target, apply a degree of confidence.
For the example above, instead of saying "the price target is 874", the trader might have said "the price target is 874, with a 70% degree of confidence".
Or whatever other percentage they thought was appropriate.
The thing is – it's NEVER 100%.
In fact, I'd go as far as to say you should never select more than maybe 80%.
How does this benefit you?
It forces your mind to accept the possibility that the target may not be hit. If we selected the target with a 70% degree of confidence, then this means there is a 30% chance it won't be hit. So in planning out the trade we might consider alternate IF-THEN scenarios involving possible exits at the range highs, should they fail to break.
Give it a try. See if this helps improve both your trade planning and your subsequent trade management decisions.
And for more advanced application… continue to update that degree of confidence as more data unfolds in real-time.
Let's start with a little disclaimer – I didn't trade this price sequence. I took a break on Friday 18th of January in an effort to manage my fatigue levels. But this does not mean that I don't review the session. The next day I scheduled some time to look over the charts in a number of markets in order to (a) see how I would have traded them, and (b) complete an entry in my Market Structure & Price Action Journal.
Yes… just because you skip a session it doesn't mean you get to skip the study!
One of the very first things to jump out of the screens at me, upon opening the 1-minute Emini-Dow futures chart, was an awesome price spike at 10:19am. This became the focus of some extra study, for my journal. And I thought I should discuss it with you here today as well.
I love price spikes – a sudden and dramatic expansion in price range and volume. Because they often create a shift in the market structure. And they allow you to immediately identify two potentially great trade locations.
Let's have a look at the charts.
One of the essential breakthroughs we need to make in our journey involves learning to think in probabilities.
It's something that all traders say they understand. But, for most new traders, their behaviour and decision-making shows that it has not been accepted.
This came to mind when I received the following email question:
– – – start of email excerpt – – –
I’ve circled the “Spike Low”. You can see from the Volume that it spiked as well…. my understanding is that this is a “test” for higher prices. When I’ve observed this very thing (over several years) Price Action “always” moves HIGHER… Today, it Moved LOWER and wanted to educate myself on WHY…
Else, maybe I have the whole thing wrong…
If you can comment and/or direct me to something on your site, that would be great.
– – – end of email excerpt – – –
Here's the chart using my usual display format. I've added a higher timeframe support level and positioned the spike at the right hand side.
And zooming in to the spike itself…
The question again – "When I’ve observed this very thing (over several years) Price Action “always” moves HIGHER… Today, it Moved LOWER and wanted to educate myself on WHY…"
My big problem is with the word "always". Yes, it's in quotes. But it still concerns me.
Here's an excerpt from my reply (noting that at this stage I had no idea of the market or timeframe and was replying based upon the original black-background chart image above).
– – – excerpt from my email reply – – –
I can't really answer as to why this move went lower, being unsure of which market and timeframe and whether this price move coincided with any news event (planned or unplanned).
Typically we can't ever know with complete certainty the reasons for any price movement. Price moves where it does based upon the orders that hit the market. Why did it go lower? Because the net effect of all the orders was bearish. Any discussion as to why trade decisions were net bearish, is simply speculation.
The error in your thought process is when you use the word "always" in this sentence – "When I've observed this very thing (over several years) Price Action "always" moves HIGHER."
Does it really always move higher? Or were there actually some occurrences where it moved lower?
We're dealing with probabilities, not certainties. Nothing "always" happens.
Even if this was a 99% probability of moving higher (which it's not because nothing is that close to certain) then there would still be 1 out of 100 cases where it moves lower. This example was that 1 occurrence.
Let's say the pattern has actually 55% probability of moving higher, which might be more realistic. This example then simply sits on the 45% side.
So it's nothing unusual. And nothing that needs understanding "why".
What is important is firstly that you shift your thinking away from certainties to probabilities. And secondly, that if you're trading something like this and take a position LONG in expectation of movement higher, that you recognise as quickly as possible that this occurrence is falling on the losing side of the probabilities, and you adapt quickly and get out.
"Why" is not important. Recognising and adapting is important.
– – – end of reply – – –
Subsequent discussions confirmed the market as EURUSD, 1 minute chart, on 26th November 2018.
So let's finish up with two additional important points:
1. Knowing the market, date and time, I was then able to confirm that the price spike occurred just two minutes after 09:00 US Eastern Time (two minutes after midnight my time). Two minutes prior to that spike there was a scheduled speech by the ECB President. Given the high-impact potential for such an event (especially given the current Brexit negotiations) it's reasonable to expect that such an event could completely shift the sentiment in the market, rendering any prior analysis and levels as irrelevant. Just something to consider!
You have to be aware of scheduled news events. You can find the economic calendar I currently use on my Resources Page – http://yourtradingcoach.com/resources/
2. For those interested, I actually have no problems with someone entering LONG from that spike. The following are my thoughts regarding the price movement following the spike, looking purely from a price action perspective.