Limit Orders at Range Boundary

EMAIL QUESTION:

Do you ever use a limit order to trigger into a trade? I've been trying to use limit orders when the market is in a trading range, selling at the top, buying at the bottom. If this is a fools game could you please set me straight with an explanation of why this won't work in the long run?

Limit orders are very seductive because I can set my stops very tight and have a good risk/reward trade, but quite frankly my results so far leave a lot to be desired.

Any help would be greatly appreciated.

REPLY:

I can't provide figures because I don't have an accurate breakdown within my stats, but I can say the vast majority of my trades are NOT taken through limit order entries. Most will be on some form of lower timeframe micro-pattern breakout.

I am comfortable with limit orders only in certain environments. Typically this will be a pullback within a trending environment where the pullback has a prior swing h/l or S/R level at it's back. With the market pressure in the trending direction, I can be more confident of the pullback respecting prior levels.

Another time is when using the YTC Scalper limit order methods in a smooth flowing market, but again the environment must be supportive of this.

One time I almost will never use them is in a ranging market. I have tried this from time to time, as it can be very seductive. Sometimes it works great. other times it will smash you. Always whenever I get tempted to do this, I eventually regret it. So I try not to now.

I do know some people operate fine in this manner. I don't seem to have sufficiently developed this skill though. Perhaps you haven't either.

The challenge with a ranging market is that it will often pop through range boundaries before reversing. So we can't use them as a backstop to our trade as much as we can in a trending environment. While these price excursions through the range boundary are more often than not a small trap before turning back into the range, the problem is that we don't really have any way to gauge how far we should let them run. And when we do let them run too far, it turns out to be an actual breakout and we take a massive hit to our P&L.

If you're finding that limit order entry into a trading range is providing net-negative results, then you need to change something.

Options off the top of my head:

(1) Avoid these ranging environments. You may find better results elsewhere, such as through trading trend pullbacks.

(2) Trade very selectively within a range. Don't expect to get all movement back and forth. Look for the lower timeframe pattern breakout entries at the edge of the range, where they have formed a particularly good trap.

(3) Trade very selectively within a range. Continue to use limit order entries if you like the idea of the great R:R they provide. But work on improving your results through being very selective with your trades. Examine hundreds (or thousands) of occurrences. And find the elements that indicate a higher probability trade. And even more importantly, find those elements which indicate a lower probability trade. This latter one is important. Often the greatest improvements to our results come through finding situations to avoid, rather than situations for certain trades.

Poor results are a good thing… they provide an indication that something is not working and changes are needed. Hopefully this has provided some clues as to your way forward.

Lance Beggs


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