Tag Archives: Environment

Real Opportunity is Found at the Edges of Market Structure

The following image was a recent post at YourTradingCoach Facebook.

Despite what the majority will tell you, Confirmation is Risk

If you want to check the pattern out, it's 11th Dec 2013; GBPUSD; 3 min TTF; at 09:51 UTC.

Today I'd like to discuss the statement within the yellow box, "Real opportunity is found at the edges of market structure, where the risk is smallest and the profit potential the greatest".

I recall back in the early days of my own trading, I had the opportunity to look at a chart of a professional trader, which contained annotations showing his entry and exit points. Talk about cognitive dissonance! That was truly an uncomfortable experience as the reality of what I was seeing did not in any way match what I believed to be true about trading.

I just didn't get it at the time.

In fact, I convinced myself that the chart was fake. There was (in my opinion at the time) ABSOLUTELY NO WAY that entries could be taken at the places marked on the chart. They were too close to the actual turning points. I'd studied Technical Analysis quite extensively. I knew that there were no TA methods to identify a turn point so accurately. You HAVE TO wait for confirmation of the move. There was no way on earth this guy actually took these trades.

Of course… I was wrong.

My own knowledge and experience were not sufficiently developed at the time to understand what I was seeing.

The reality, for swing traders, is that opportunity is found at the edges of market structure where the risk is smallest and the profit potential the greatest.

Most traders seek confirmation… by which they mean that "they need to see price having already moved in their expected direction". They enter simply in the hope that this movement will continue.

This is a psychological crutch. It offers them nothing from a reward:risk perspective. It usually offers them very little in terms of greater win percentage. But it eases their uncomfortable feelings. They see that others have already entered, so they feel comfortable following the crowd.

But who do you think has caused the initial movement? Who do they think created the confirmation?

It can't be those who only enter after confirmation. It has to be those who have a deeper
understanding of how price actually works.

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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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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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Taking Profits – Adjust to Suit the Environment

Reader Question:

I've got a question related to taking profits. I'm having some great success with entries (finally) but am always torn between taking profit at 1:1, 2:1 (which I've found to be more common lately) or holding out until the next S&R.

I know you take 1 profit off the table at 1:1, move your stop to B/E & hold out for larger gains. From your experience was there any other methodology or have you found yours to be the most profitable?

I'm trying to read the price action after entry and it doesn't give too many clues, other than in hindsight.

Response:

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Pullback Specialist

There's no greater source of motivation for me (and hopefully for you as well) as seeing someone achieve great progress along their journey to becoming a trader. Well done, Bijan! Excellent work!

Reader Email:

Hi Lance,

A while back I was thinking to my self that the people that make the most money are the one's that specialize in their profession whether it's a doctor, lawyer, dentist, or any other career. So I decided instead of being a jack of all trades, to actually specialize in PB / CPB setups.

This has forced me to look deeper into the nuances of every pullback setup. This deeper analysis has proved to me that its not about the setup, rather its about reading the thought process of other traders. Reading about this in your newsletters and especially in YTC Price Action Trader is fantastic, but to actually follow your advice and do this LIVE bar by bar in real time has been the key factor for me.

Although I continue to trade TST & BOF setups, I love being a specialist in PB & CPB setup.

Just in case you'd like to see my thought process, I've sent you a few of my recent trades as examples.

Btw, these charts are all from stock symbol "SPY" 3min, 1min, & sometimes 1min, 30 seconds time frames.

Cheers

Bijan.

Chart Images: (NB. Click on the images to open a larger copy in your browser)

pullback specialist

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Expectations for the Pre-Holiday Session

For intraday traders… the following outlines my expectations for trading the last session before a long weekend.

  • I always expect a narrow-range, low volatility and low liquidity market. I monitor it with an expectation of having no trades, UNLESS the market can prove that it wants to make a strong directional move. Only then will I trade. And as soon as I suspect that directional move is over I will stop.

Here's some email Q&A:

Hi Lance,

Would you go short here…or is there any obvious reason why this is a no-go??

greets, G

Reply:

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Avoiding Lower Probability Environments

Late last year I released a popular series of two articles which dealt with the topic of "Winning through Losing Better". You can see them here if you missed them: Part One, Part Two.

I was reminded this week of a comment from Part Two. Here's the relevant text from the article:

Search for market environments which cause you to underperform.

For example:

  • If you don't trade well in ranging environments then you may be better sticking to trending environments only. If your database of losing trades shows difficulty in a ranging environment, find the clues that can alert you to this type of environment, and then learn to stand aside as early as possible.

 

I've mentioned previously that one easy way to do this is to avoid holiday sessions (see here). While they may on occasion offer great opportunity, more often than not they will be lower liquidity, narrow range markets.

The same concept often applies to those sessions that precede potentially volatile and significant news events. Wednesday offered us one example. With the FOMC Statement being released at 1400 ET, most of the day leading up to that time will typically offer a more challenging environment. Again, like the holiday sessions there is no guarantee. Some days can move. But as a general concept these sessions are more often than not lower liquidity and lower than average range markets.

Options:

  • Anticipate a rangebound market and plan trading accordingly (for example, aiming to fade the failed moves at the edge of the range, or through reducing position sizes).
  • Anticipate a rangebound market and sim trade only, in order to improve skills within these more challenging environments.
  • Anticipate a rangebound market and stand aside, but monitor the session with the intention of trading if a directional move does occur.
  • Stand aside till the FOMC release with intention to only trade after the news event has occurred.  (Not a good option in my UTC+10 timezone!)
  • Take a day off. Enjoy life. (Or in my timezone… catch up on some well deserved sleep!)

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