Knowing when to change directional bias at the right time for a profit

I met a reduced target on the short from earlier for a profit of 10.75 points, and as I said, it was placed where it was because of the high probability of support at that level. When price trades are PDL or PDH you need to recognize which side of the market is controlling. Here is an example of how you need to know when to switch direction and stop pushing a side of the market; basically, do what the market is telling you.

How to hold on to a trend trade and not exit early: Major support breaker signal

I've been really busy with things lately so I haven't had much time to commit to the site. I figured I would post today though since I decided to trade today and take a break from my other project.

Its important to know when to enter a trade, but its even more important to know when to exit a position. The major mistake of most traders is exit too early on their profits and staying in too long on their losses. I make it a point to cut losses quick and keep them small. I also try to hold a trade as long as possible, until its invalidated. Here is an example of a major support breaker entry signal with a max target at previous day low. If you look, I'm risk-free in the trade now, and have a very large target. This target will get adjusted if certain conditions occur, which are mentioned on the chart.

Counter Trend (CT) trading the high probability way, be realistic with target and risk

Counter trend trades pose a higher risk because you are fighting the trend, BUT when weakness in a market side occurs, they became high probability; or should I say the dominant trend trade becomes low probability? It doesnt really matter how you justify it, the most important thing is to recognize the buyer or seller weakness or failure, and act on it. You want to be safe with these types of trades, and only take then when the weakness if recognized. I have a minimum of 1:1 risk to reward on these setups. I try to be realistic on how far the move may go and I assume a pullback over a reversal. For example, if I can see a pullback going 2.5 points, $50, I'll place my target there and start with a stop of $50 max. Once I get movement, I adjust it to one tick above/below entry.

HT Entry Setups: Breaker

This is a major resistance / major support breaker. The minimum amount of resistance (support) required is a double top (double bottom). You want the price structure / context to agree with the setup though, so you don't just want to be taking every single DT/DB break, you need to filter out the lower probability ones. If the breaker is at the HOD or LOD, the setup is higher probability. Like I said, you want to filter out the lower probability setups and try to only take the stronger setups. Stop starts out at 1 tick below / above entry bar. After you meet target on the first contract, you want to move stop to -1 point so that you are risk-free on the overall position. After movement in your favor of 3+ points, you want to move stop above your entry price. Worst case scenario, you are still securing a profit on the overall position.

HT Entry Setups: A1 (H1 at the EMA)

Throughout their trading careers, traders get a lot of information thrown at them. Some information is valuable other information is garbage. One trader that I feel is a very good trader and has an extremely great system is Al Brooks. I'm part of http://www.brookspriceaction.com/ which is a website of traders who trade using his methodology.

The most successful traders take the best parts from the best traders, incorporate their own ideas, and output a system that produces profit. I took Brooks' concept of H1 and L1, added my own idea, and created a signal entry from it. I call it an A1. It's essentially an H1 or L1 that occurs at the EMA.

I enter with 2 contracts. Target on the 1st contract is 1 point, target on 2nd contract is at least 4 points. Stop on both is at invalidation, max of 2 points. Your max risk on the trade is $80, but the goal is to get the 1st contract filled and move stop to -1 point then, you are risk-free at that point! After movement in your favor, you move stop above entry and then trail the swings.

When to buy the highs and when to short the highs. Structure will dictate.

One of the most difficult things for traders is buying the highs. They are worried that the market will reverse to the downside because its over extended. What usually happens is that the trader will continue shorting the highs and get cut to death buy a 1000 papercuts. Every entry is short, thinking the market is due for a reversal.

The price structure / context of the price at the highs will dictate what one should be doing. Its never 100%, but it gives you a little bit of an edge if you trade the highs using the structure.

My rules for buying the highs:
1) Fundamentals and technicals are in bullish agreement. This way, you have both schools of thought buying into the market.
2) Where are magnets? Open, Institutional Number, PDH / PDL, etc.
3) The breakout of highs will result in a value area shift. For example, you are breaking previous days high and current days high at the same time. Probability of a break of few ticks (Buyer Failure) to take out stops is very low.
4) The structure dictates that the break of HOD agrees with the structural formation. A break of trend (BOT signal) in the direction of the HOD break increases the probability of a HOD long trade.

My rules for shorting the highs:
1) Fundamentals and technicals are not in agreement / don't have support from eachother. Technicals may be bullish but fundamentals bearish. This reduces probability of buying highs and increases probability of shorting highs.
2) Where are magnets? Open, Institutional Number, PDH / PDL, etc.
3) Breakout of highs doesn't shift value. For example, breaking of highs may be forming bullish channel, moving to upper trend line. And the breakout is likely to take out the stops at HOD (Buyer Failure) and then reverse back into the range price structure.
4) HOD break is not signaling a BOT, rather its continuing the structure of range, bull channel, wedge, etc.

When to re-enter the market after you get stopped out. Only after BF or SF

It's one of the worst feelings of trading: being in a trade, getting stopped out, and then the market rallies in your original direction. When this happens, don't get upset.. do your analysis and proceed with a course of action. Did I get stopped out on a Seller or Buyer Failure? Did I get stopped out for a valid reason? It will depend. BUT if you got stopped out because of BF/SF look to re-enter.

Here's my example. I was long, knew I should be long during the trade, and knew there was a high probability that any seller activity will fail. However, I kept adjusting my stop below swings according to the plan. I eventually got stopped out on this trade on a 123 failure. Because of the failure, I looked for re-entry, knowing that if I took the short signal that just occurred, I would be holding a losing position.

IMPORTANT: Manage your stop properly, don't be exposed to large risk on these types of moves (view my 5 min charts below- $20 risk for around $100 return)

 

Trading Price Structure / Context: Bear Channels. Entering on BOT and Al Brooks A2 signal

Here is how to enter on BOT. The most important thing is your stop in this case, because you're trying to get price advantage on this move.

Using Al Brooks entry system, your initial signal was the A2 with B12 being the signal bar and B13 the entry bar (Second chart). Bull validation was the double bottom there. If you missed the initial signal, second entry was where I got in on the BOT signal.

IMPORTANT- Move stop above entry after market goes in favor. You will then be risk-free.

UPDATE: Move stop above entry to new invalidation point

UPDATE: Move stop above to new invalidation point

Al Brooks A2

Trading Price Structure / Context: Bear Channels

Here is how I trade price structure / context, specifically bear channels. If not recognized, a trader can lose a lot of money getting chopped up in a bear channel.

If you're trading WITHIN the bear channel you want to:
- Sell the highs
- Avoid trading in the middle
- Could buy the lows, but the probability becomes reduced
- Should always have your target on the other side of the channel, REASONABLE. Dont expect that you picked the point where the market will sell off or rally in your direction a million points. Be realistic. 

Waiting to trade in the longer term direction here, which is Bullish, you need a BOT signal to the long side. I don't usually take the initial BOT signal long (as I should in the wedge example), I take the 1st pullback after the BOT.

The chart explains my way of trading bear channels and the continuation into the longer term move expectation.

Trading Price Structure / Context: Wedges. How to enter after the signal. Part 2

So yesterday (previous post), I talked about how you need to recognize and trade price structures a certain way. Into the close, we had the breakout signal I was looking for. Then, our goal was to look for an entry signal, we had 2 opportunities to get into this move.

I determine move potential in 2 ways:
1) Measured Move
2) Point of Interest / Significant Level

In this case, my target was around 1) 2600 (Institutional Number) and 2) Move to PDPDL (Solid red line from yesterday / the top of the green rectangle)

Trading Price Structure / Context: Wedges

Sometimes, the market just isn't giving any high probability setups. It's important to know when to participate and when to sit on your hands, this is one of the most important rules in trading. Its very difficult however to sit and do nothing, because we always want to be in a trade, worried that we'll miss the "move".

I like to draw on my charts and determine where I'm going to trade. Certain structures will trigger plenty of high probability trades. For example, a very strong bull trend channel is traded a specific way. There are rules to the side of the market that you trade and how you enter.

Today, I want to discuss wedges. Below is an example, real-time, of the current wedge in the market. To setup the scenario, the market sold off very heavy overnight and it is now ranging. It is unlikely that it will reach pre market highs levels, and it is unlikely that the sell-off will extend another measured move. Because of this, the current environment is untradeable at the moment.

To be tradeable, I want to see a break of the wedge range that is successful. The pullback should not channel back into the wedge if the breakout is strong. A very important rule is to NOT TRADE THE MIDDLE OF A WEDGE, you will get chopped up in the price action! The blue horizontal lines are swing points of importance. You want to recognize price acceptance and rejection around those areas. Above and below those swings is where a lot of stops are placed, dont expect strong breakouts of swings, rather expect stop hits and failed breakouts.

*IMPORTANT* Remember, you want to see buyers succeeding in the buy zone and / or sellers succeeding in the sell zone for the position to be high probability. If you have failure in either zone, the opposite is warranted and the wedge may be an expansion into a larger range.

You DO NOT want to see seller failure on the break of the major swing low above the current day LOD. If this occurs, it is a sign of continued ranging. Same on the upside. You want those swings broken strong, not just broken to take out stops.

How to keep your charts simple yet very powerful and informative

The most important thing when analyzing charts is to know what's going on. You don't want to be confused with too many indicators and have information overload. I keep things very simple. My main chart is the 5 minute chart. I have 1 indicator on the chart, a 20 day EMA.

I also have levels that I find significant. I utilize prior and current day's price levels as well as institutional numbers.

When I look at my chart at a specific time I follow this process:

1) Where is price in relation to the levels?
2) What is the current price structure? (Context, as Al Brooks calls it)
3) What is the highest probability setup taking the price and structure into account?

I enter about 90% of my trades with a Stop Limit order, thinking that I want to be swept into the move. I very rarely use limit orders. The only time I use limit orders is if the price structure suggestions a range and that the probability of the breakout is very low. I don't take these trade often, because trading in ranges usually leaves to overtrading and frustration, but I do take limit trades once in a while.

Here is what my chart looks like:

Next, I have my "rules".
1) Try to trade on the side that price is in relation to the EMA, unless we're in a range and the EMA keeps going from green to red to red to green, suggesting chop / no dominant trend
2) If below PDH, look for shorts / buyer failure. If above PDH, look for longs / seller failure (breakouts up)
3) If above PDL, look for longs / seller failure. If below PDL, look for short / buyer failure (breakouts down)
4) Rarely assume a current HOD or LOD will break by only 1 tick if there's a dominant trend. You are catching a falling knife in this scenario.
5) If the structure agrees, a 1 or 2 tick break of HOD or LOD may signal a stop run. You want to fade the HOD / LOD breakout in this case.
6) Try to visualize what happened and what is likely to happen. If the market is selling off hard, assume three pushes to the downside, don't try to buy until sellers are exhausted.
7) Be realistic with targets. Don't expect a 20 point move in a range, never assume the market needs to reverse or do something.
8) KNOW THE STRUCTURE / CONTEXT. Know what to expects in a bull / bear channel / wedge. Always trade with reasonable targets. The guy going for a home run every time never wins.
9) Know when to trade. Know your environment.

Easy to read screens have improved my trading dramatically. I started out trying every indicator with no success, I ended on almost no indicators with much better results.

The question that all traders have is "ok, so when do I enter". I have a few ways that I enter the market. The more advanced way / technical way is using Al Brooks, H1, H2, L1, L2 entries. They're simple, you enter on the break of the previous 5 min high / low. An H1 / L1 is that 1st time that this occurs in a pullback. An H2 / L2 is the 2nd time this occurs in a pullback. The highest probability one is entering an H2 / L2 around the 20 day EMA. That's it.

Another entry that I have, which occurs 0-4 times a day is a buyer / seller failure trade (FBO). This is recognizing the FBO or stop hit, and then entering the market with a max stop of 2 points and having your stop below / above the failure swing. I will try to discuss the entries in more detail in the coming weeks.

Failed Breakout (FBO): 5 Min as Signal Bar and Entry Bar

This is continuing a discussion from Brooks Price Action forum:

http://www.brookspriceaction.com/viewtopic.php?t=1459

This is post 1 of 2. In this post I will show how I recognize the Buyer / Seller Failure (FBO) on the 5 minute, use the 5 minute Signal Bar, and a 5 minute Entry Bar.

The following post will include implementing the 50 tick for Entry to enter during the formation of the 5 Minute Signal Bar.

This strategy is less advanced than the 50 tick addition, but if strictly trading the 5 minute, your stop may be at uncomfortable levels because you're waiting for the 5 minute to close. However, its systematic and there is little questioning of the setups.

3/1/12 Seller Failure (Failed Breakouts): How to recognize the signal and how to enter the trade

I see the seller / buyer failure occur approximately 0-4 times a day. Some of them are very strong signals like the one below. I categorize a very strong signal as one that never re-tests those levels during the trading day. A signal that may not be as strong can generate the signal and then run in your favor for a few points, say 4 to 5 points, and then reverse back to the origination zone. Its important to decide whether the SF or BF trade will run or if it will only give you the opportunity to take a few points. Either way, its a very high probability low risk setup.

First you recognize a swing point that is to generate a breakout signal. It will either breakout and follow through; or breakout, trap the bears, and fail / rally.

You want to recognize the failure.

If the failure was valid and strong, the level should never get re-tested during the trading day.

On a smaller time frame chart, you see the breakout failure. Its visible that after the failure you had a quick move in the opposite direction. This is usually due to bears' stops getting hit after failing to breakout to the downside.

Here is the entry signal on the 50 tick

Instead of assuming this will happen, which is a reckless strategy, try to recognize it and enter into the stop run. What I try to do is enter a stop limit order about 2 points away from the failure swing low set in. The concept behind this is that you're getting swept into the move and if the seller failure is strong, the failure point should not get re-tested anytime soon. It should at least give you a comfortable move in your favor to allow you to move your stop above entry.

Let me know if you guys have any questions.

2/14/11 Seller Failure

2/9/12 Market Analysis

Fundamentals
Futures Gain on Greek Deal Report, Jobs News

Economic events today
None

Technicals
(Analysis provided on chart)

The chart above identifies and analyzes current price in relation to:
- Price structure, previous and current days’ “levels”, trade/no trade zones, and magnets

2/7/12 How to recognize reversal points and the way to enter them: Where to place your targets

Here's a quick example of how I recognize reversals and the way that I enter on such recognition. I also show WHERE I place my targets and why. This target management has helped me from getting stopped out at break even and assisted in setting realistic / thought out targets for my positions. I place them at levels, not random points.

2/2/12 Market Analysis

Fundamentals
Stocks higher after jobless claims

Economic events today
10:00 am- FED Chairman Bernanke testifies
Technicals
(Analysis provided on chart)

The chart above identifies and analyzes current price in relation to:
- Price structure, previous and current days’ “levels”, trade/no trade zones, and magnets

2/1/12 Market Analysis

Fundamentals
Wall Street to open higher, futures hold gains after ADP report

Economic events today
10:00 am- ISM

Technicals
(Analysis provided on chart)

The chart above identifies and analyzes current price in relation to:
- Price structure, previous and current days’ “levels”, trade/no trade zones, and magnets

Trading Buyer (Seller) Failure: The Lowest Risk / Highest Probability setup

Here is the progression of a position from after hours just now:
4 points profit

Consistency is key (In losses especially). How I use Maximum Favorable Excursion (MFE)

You want SMALL losses. I have a max loss of $40, 1 trade in the chart had -$45 because of slippage. Small losses are quick and easy to forget about. You never want to be stuck in a losing trade / digging yourself a hole. Always cut your losses quick!

MFE stands for Maximum Favorable Excursion. It is a measure of the most profit that COULD have been extracted from a given trade. For example, a position goes 10 points ($200) up from your entry and you end up exiting at 6 points ($120), this results in an MFE of $200 and a DIFFERENCE of $80. The difference is what I care about most when analyzing my results.

Check out this chart from my most recent 20 trades (approx):

I want to stress that I take consistent small losses which are expected in this business. I have a max loss of $40 on a trade. My goal in a position is to be correct on a move and average into the trade with another contract. So I take what I call “attempts”. When I’m getting stopped out for $5, this means the expectation of the move never happened or I got stopped in a quick move back. The thing to realize is that each one of those $5 “attempts” were RISK-FREE after moving my stop and my profit potential was theoretically unlimited.

Remember, keep losses small and try to move your stop to risk-free as soon as possible.

1/31/12 Daily Recap: Trades explained

After running the blog for some time now, I got a sense of what people want to read and find valuable. I also realized what helps me out the most in my trading. People want to see how I analyze the markets and forecast. Then, they want to see that I actually trade the way I’m saying, and that I’m turning a profit (or else they wouldn’t follow). I myself want to know that I’m systematic, performing an intelligent analysis everyday, and trading based on that analysis. Anyways, I’m going to have a market analysis posted every morning pre market or the night before if there’s movement in after hours. At the end of the day, usually the afternoon, I will post a daily recap. This will go over a few positions that I took and how/why I took them. Please let me know if you have any suggestions. Thanks!

1/23/12 Trade results: 5 trades, $285 profit. Trading hard trends and breaker signals

Today I had 5 trades for a profit of $285. I made 1 really big emotional mistake and took a loss of $100 on the trade. The trade should of had a max loss of around $50-$60, but I let my stop get hit at 5 points, which was way out of the way of the initial invalidation point.

This type of a mistake is an amateur mistake that needs to be corrected / never repeated. I will make a video later on discussing how I should have managed that position properly. It will detail the concept of invalidation points and risk elimination upon movement of price in your favor. I did not apply any of those concepts during that trade, big mistake!

1/20/12 Trade results: 4 trades, $45 profit. Using price magnets to trade

Today, vey slow day in the markets. A lot of failed breakouts, tight range, and low volume. This is typical of Fridays, thats why I trade very light Fridays and do not expect much from the markets on tight range days.

I want to show how I use price magnets to trade. I mainly use them as targets for trades because around those levels there is indecision. Look at this chart, and then the following:

The open is a major magnet because it determines whether the instrument is + or - at a certain point in time. I use the open as a target in the above trade.

Here are the trade from today.

Review the past week; your trades, decisions, actions. Take your new knowledge and experience from this past week and get prepared for the next trading week. Most important of all, enjoy the weekend!