Hi guys. I want to clarify something that i guess i’m learning - specifically to do with tops and bottoms.
I have a £1000 account and am ok with 2% risk.
I’m having more success when entering trades that are trending by waiting for the price to peak in the opposite direction, or be at the extreme of the channel, and I seem to be confused about why it is said never to try and pick tops and bottoms, about how it’s a losers game and it’s where the hard money is - for as i understand my methods i must pick the tops in a downtrend or the bottoms in an uptrend in order to profit, because if i don’t pick a good time to enter then the market will go against me enough that my R:R is rubbish or that i spend most of the trade on edge as it hovers near my SL before either returning back or stopping me out.
Let me show you an example and give a little context.
This screenshot from my phone shows an example where i “picked the top” - at least that’s what i’d call it, if this isn’t picking tops and bottoms, then what is it that i’m doing? I analyse and place a pending order.
See, i’ve been eyeing up this pair for a while and belived from looking at the graphs and reading market sentiment that it is in a downtrend on the 4H timeframe, but kept watching as for 2 days it rose in price, I’m always trying to find the right time to enter and have been burned in the past by entering at a wrong time and spending nearly all of the trade in the red, or getting stopped out. I picked a time at a psychological level where i believed it would stick and reverse where it was at the top of a decending channel and i was right and this was a winning trade for me. People always say this is a bad idea but why?
When following the trend the price moves in waves on its way up or down, why would you not wait for it to be at the top of the wave before shorting and vice versa?
How do you guys trade the trend? Is my method flawed? Views welcome!
Nick
Yes, its the usual advice to new traders that they do not try to pick tops and bottoms.
In reality, if its working for you and you have risk management techniques to control your losses, then stick with it.
Its a sliding scale -
trading reversals is a high TA skill, high frequency, low probability, high reward, highly subjective approach to trading
following trends is a low TA skill, low frequency, high probability, low reward, objective (even mechanical) approach - but which also offers the possibility of repeat trades / pyramid trades
Few people can be comfortable with both. But luckily that’s not necessary, just be good at one or the other.
Thanks for the reply.
What i don’t quite understand is any other way to approach an entry? since my opinion is that there is a downtrend and i have no evidence of that changing other than price reaching my SL, so i will wait until it rises to the top of the channel, which in my mind is least risky since i still have a little room up top for volatility and by entering higher means my SL is higher up or places me with lower potential losses, but if i entered when i first noticed of the pair, on the image you’ll see a peak on the 23rd - 1 peak before i entered, i didn’t take this trade because the price didn’t go high enough for me, if i did enter there i would still have won but would have been in the red for a day hovering near my SL and i would have had a poor 1:1 RR, which doesn’t feel so good. Based on my 6 months experience i don’t know how else i should have entered that trade. I’m open to improvements or suggestions if you have any nuggets
Well, this sort of just shows what I was saying about reversals trading being subjective. I’m not the best person to advise here - you can probably guess I’m sceptical about long-term success accruing from subjective entries into low probability trades.
This is good though this is what i want to know - more about this scepticism you have since i know it’s not without good reason and you have enough experience to know what you’re talking about. In your personal opinion do you think my trade set to enter at that the top of the channel is risky and will eventually over time see me possibly opt for a different way of entering trades?
At the moment, this seems to be working for me, but i’d like to think i’m never too smart, and can always improve how i go about thigs. It’s good for me to learn from the experience of others as well as my own mistakes/lessons, and i’m just looking to understand more about what it is i’m doing.
Nick, for six months of experience that is a phenomenal entry! It’s not about picking tops and bottoms rather it is about entering a trade using market structure. When you become proficient at it you will naturally pick tops and bottoms. Search YouTube for “market structure trading”.
I see also that you have no indicators on your charts. That’s impressive but then you talk about channels. My suggestion would be to not consider trend channels or diagonal trend lines. Learn to trade the naked chart using only price action.
Im not comfortable with trying to pick tops or bottoms because I prefer to react as opposed to predict but like @tommor said, if its working for you keep at it.
I don’t recommend giving up a technique that is profitable and which does not involve excessive risk of ruin.
I suspect when you look back at charts of old trades you will see many places where you made a completely correct entry at a reversal point but two non-obvious things will be apparent with more results in your log. The obvious stuff I outlined already - very low win rate etc.
Firstly that you will realise that in 2021 you would not be taking many of the trades you happily took in 2020. This is an aspect of the subjectivity of the TA required for reversals trading. Not only is every reversal different but even the same trader will often struggle at a later date to TA the same chart in the same way to get the same result.
Secondly, you will see that the winning trades could have been run in a different way when the reversal led into a new trend. These will be the trades that brought you the biggest returns. Many times, entering right at or right after the reversal point was unnecessary risk and irrelevant to the net performance of trades along the trend. Especially bearing in mind that in a trend you can pyramid your initial trade when it reaches break-even, and then pyramid the second trade when that reaches break-even and then pyramid the third trade etc. etc. - this rarely presents in a range or channel trade.
At that point, I suspect you will decide to make your trading easier, more predictable and more consistent by just taking the trend trades.
over-focus on entry - This leads to intense research and experimentation with very specific candlestick patterns, based on over-confidence that these predict the future price action and trade outcome. They don’t. Many of them look great on a chart and there is almost always one of these at the reversal point in retrospect. The trouble is they are also found mid-trend where they signified nothing at all.
Also worth being aware that almost all candlestick patterns were recognised and researched in markets with an overnight closed session. So the entire market stops trading at the same time, conducts a review at the same time and then starts trading again at the same time. The immediate effect is that naturally opens can be miles away from closes and this gap is often crucial in identifying and using candlestick patterns. Overnight closes do not occur in forex.
blind faith in indicators - Similar to the above, but its just a different kind of rabbit hole. Picking reversal points seems very akin to predicting the future. Indicators are often touted as a way to predict the future. They’re not. But predicting the future seems to be the way to make reversal trades work so its a natural error in logic. But it won’t work.
Do you really use no indicators at all? Sometimes ( considering other factors additionaly) they help you to spot oversold/overbought areas for an entry.
Another option is to look on a lower time- frame for an entry point.
Thanks QuadPip. When i say channels, i mean a visual descending channels that i identify by looking at the raw chart since i don’t have access to indicators. I wouldn’t mind using 50 100 and 200 SMA’s as i’m aware currency pairs are influenced by those levels where they may find support or resistance, similar can be said by fibs but i’m at work during the day so most if not all my trades are taken from my phone, so i’ve been forced to learn charts as they come if you like, since the app i use has no indicator support, but hey-ho as long as i’m profitable then it’s ok.
Thanks for the ‘market structure trading’ tips. I’ll be sure to check that out!
Nick
I see what you mean by waiting for confirmation of the new direction rather than the anticipation. I just guess for me when i do that the price will move in the way i think enough for a confirmation, i enter and then it soon changes and after i’m stopped out hindsight just shows what i thought was the signal to be either a fakeout or just good old fashioned volatility. More experience needed i guess.
Great read. Thanks Tommor. Interesting you mention how i will probably trade differently in 2021, i also imagine i would too given the new experiences i will have had, and will look back on my old trades, winners and losers, with a more knowledgable head.
When it comes to candlestick patterns and reading them for entry signals - i tend not to listen or take too much notice of candlestick patterns, ‘the 3 bar play’ and whatnot, since i find that anything can happen, you’ll get a bullish engulfing candle met by a bearish engulfing candle next and all the things that contradict what the previous candles were supposed to be suggesting. I’d rather just look at the flow of the whole chart from 1w 1d 4h etc zooming in to 30 mins depending on each trade and coupled with market incentive will take it from there.
Hi. Well if it was up to me i’d use 50 100 and 200 SMA and maybe fibs given that they can be used to plot or suggest upcoming support/resistance levels. But the way i trade is normally while im at work so i use my phone which the mobile app doesn’t have instrument support, so i’ve had to learn to read graphs without them. I’m getting better at it though so it’s getting easier. though some indicators would be nice!
You could use mobile MetaTrader4 on your phone. Thats great, you can also load some indicators on the screen and all the other usefull features (Mov.Av,Bollis,…), also demo accounts available
By identifying tops and bottoms you have climbed up only one step. There are still two steps you have to follow. I will tell you the process.
There should be enough spike or dip for reversal to happen.
Price level should come around support/resistance. If it is down-trend, then the price should have reached the previous support level. For up-trend, vice versa.
There should be a clear signal of rejection at the support/resistance level ie hang man or hammer at bottom. After the rejection signal, then enter the trade as the rejection itself suggests there are buyers or sellers waiting for the reversal to happen. The rejection candle should have twice wick of actual body.
I hope this will improve your winning trades at least by 80%.
