Hi Aaron, really getting into this thread now as Im starting to understand more of your teaching. I love it well done.
Id love to know more about your USD/JPY trade once its played out. If you get a chance that would be great.
Mike, great post, have been there many times. I too am a perfectionist, have learned to NOT to get used to being wrong, I just do not accept it - never even contemplate getting used to being wrong.
The scenario in your post - regardless of all the plans, rules, trading strats, TA or PA arguments, S/R lines or whatever, when I’m closing up for the night and I’m right (i.e. in profit) then I hit the close button - only rule I apply, do not look back to see could I have been more right.
Jesse Livermore said that one of the greatest impediments for a trader is “hope” - maybe L. Williams is correct when he says that every single trade he enters he contemplates that it will be a loser - he anticipates what actions he can undertake to correct that assumption.
Anyways, thks for a great post.
Hey Mike,
Know the feeling! I wanted to make a couple of points that might, I hope, help you with your emotions with trading, because it has helped me…
One trade does not a trader make…you have to look at your trading over a large series of trades, and if you are following your trading plan strictly, then you should be confident in the fact that over a large series of trades, you will make money. Truly Understand this and embrace this concept and you should no longer feel emotional about one losing trade.
It may help you to add a trailing stop to your order, so your stop goes automatically to break even at a logical level, EG when price reaches a potential stall point, say a minor horizontal level between your entry and take profit, then you can go to bed without worrying you could lose your whole 1R.
My own psychology, and so my trading, improved hugely when I stuck to higher timeframes, it just gives you more time to plan your trades and feels less hurried…it keeps me calmer when trading and reduces anxiety…couldn’t see your image post that well but it looks like you are trading the 15min charts…
Also, if you are trading live (I assume you are) you must only trade with a position size that you are truly comfortable with losing, because you could lose on any trade…trading too large a position size is guaranteed to make you lose sleep at night and to worry about every trade.
Finally, the best book on trading psychology I have read and has changed the way I look at trading is “trading in the zone” by mark Douglas…if you’ve not read it yet, it pays reading and re reading…
Best of luck.
Amy
Yep, the best book on trading psychology I have read so far. Turned my trading by 180 degrees. Very easy to understand and read, and the examples in the book will help you not only in trading, but also in real life situations.
Part 1: Retracement Entry Techniques
What is a Retracement Entry?
A retracement entry is a trade technique where you enter a trade on a price retracement of a price action signal. A retracement entry not only gets you in at a better price but can provide 2-3 times or greater the RR you would get entering at the break of the price action candle. A retracement entry is built upon the idea that the price action pin bar or other candle formation has already confirmed a false break and potential price reversal. Entering at a retracement can be slightly more risky, but the reward for a well place retracement entry can be tremendously larger than the added risk.
Why Retracement Entries Work
There is a common misconception, which is that a break of the candlestick “confirms” the candle. In reality the candle itself is confirmation of what we are looking for as price action traders. We often look for price reversals. This means that price is traveling in one direction, and then forms a large rejection candle telling us that the market perceives the asset as overpriced, and that price may reverse in the near future. The pin bar, engulfing bar and 2 bar reversal is the confirmation we are looking for. Many times price does not immediately reverse after forming a price action rejection candle(s). This is because there needs to be a complete shift in supply/demand before the reversal can occur, which can sometimes take hours or even days. While the market is making that shift, many times price will move up and down within the body of the price action candle. This price retracement of the candle body can provide us with opportunities to get in the trade at a better price and greatly increase the RR of the trade. While price is moving within the body of the price action candle, it will often run into minor resistance that keeps it from moving higher. We can place entry orders at these areas of resistance to get in our trade at the best price, while at the same time having a buffer between our retracement entry and stop loss.
Retracement vs. Break Entry
In price action trading, I don’t believe in one size fits all trading rules. While creating a simple set of rules may make it easier for a beginner trader, a trader should grow in his understanding of the market and learn how to apply different techniques to different setups. This idea applies to entry techniques. I don’t believe a retracement entry is right for every trade, and I also don’t believe a break entry is right for every trade. Once a trader learns how to analyze market structure, he/she can pick the right technique for that specific trade. If a trader stays focused on trading only the best price action setups and using proper retracement entry techniques, much more profit can be made from the trade with very little added risk break entry. Retracement entries have been a complete game changer in my personal trading and I have seen it become a game changer for others also.
Retracement Techniques
Major/Minor Support and Resistance
In the same we that we look for major support and resistance areas for price action signals to form, we can use these same areas to place retracement entry orders. These support and resistance areas have already rejected price once(thus giving us our price action candle(s)), and it is likely it will reject future attempts at price breaks. These S/R areas are the first place to considering setting an entry order. There are two cases where this type of retracement entry is not optimal. One is that the S/R line is right up against the body, which means it doesn’t provide much room for retracement. In that case you may want to look for another area for a retracement entry, or enter at the break of the candle. The other case this entry is not optimal is when the S/R line is at the very opposite end of the price action candle. These are the cases where the price action candle barely touches the S/R level, rather than being “up in” the S/R area showing a good false break.
Previous or Proxy Candle High/Low
If there is not an optimal S/R area to set an entry at, the next best retracement areas are a previous candles high/low or proxy candle. If there is a previous candle high that is midway up the price action candle, this can create a great place for an entry order. If the previous candle does not offer an area for retracement, there may be a proxy candle from a previous swing that will offer an area for a retracement entry. The proxy candle is not the previous candle but a candle from a previous swing. The reason this is the next best area is because candle highs/lows can help create minor resistance areas.
50% Retracement
This is the final resort for a retracement entry if there are no optimal S/R areas or previous candle high/low to set an entry from. The 50% retracement comes from the idea that price tends to revert to its mean, which means that price may travel halfway up the price action candle before reversing. This retracement technique strikes a balance between getting in at a good retracement level, while still having a good chance that your retracement will be hit. This is a last resort entry technique if there are not other optimal areas to enter at.
When Not to Use Retracement Entries
There are times where it is better to use an entry at the break of the candle. This can be when the S/R level or previous candle high is too close to the break of the candle, or when you are entering a counter trend trade. In the case of your potential entry areas being too close to the candle break, the retracement would provide little extra benefit. The reason we accept the extra risk, is because the benefit from successful retracement entries is far greater than the added risk. When the entry areas provide little extra benefit for the added risk, some traders may just enter at the break of the PA candle or try for the 50% retracement technique. The other situation where you may not want to use a retracement entry is in counter trend trades. Counter trend trades by nature have extra risk. If you are not experienced in filtering out poor quality counter trend PA setups, entering at the break may help keep you out of poor quality trades. Due to the added risk of a counter trend trade, entering at the break helps level out the risk of the trade. Ultimately it is up to the trader to understand his/her own abilities in finding high quality trades and then deciding how much risk they are willing to accept for a given reward.
Conclusion
We can see that retracement entries can provide much greater RR trades while adding in a minimal amount of extra risk. It is still important to understand you will lose more trades this way, but you are accepting losses for the much greater rewards from your winning trades. Many beginner traders believe success is all about win rate, and many price action teachers try to sell their methods claiming high win rate %. This is erroneous if not down-right deceptive. Many new traders are sucked into this belief that a high win rate equals success in trading.
As long as you are achieving risk reward setups that justify your win rate, then it really does not matter what your win rate is. I.E. if you are achieving 1:10 RR on your trades, then a 20% win rate would mean you are a very successful and profitable trader. If you are achieving a 50-60% win rate and 1:1 RR entering at candle breaks only, then adopting retracement entry techniques may drop your win rate to 40%, but your overall RR may increase to a 1:2 or 1:3. That means you are giving up 10-20% of your wins for a 100-200% increase of profits from your winner. It is obvious the retracement trader is making a significantly larger amount of money in the long run. On a final note, it is important to remember that retracement entries will not work for you if you are taking poor quality setups. Entering at the break may allow the trader to avoid getting into poor quality PA setups. A retracement entry guarantees you will enter the trade, which means you must be confident that the trade is high quality. If you are choosing high quality trades, then you will find retracement entries will succeed almost as often as entering at the break of the PA candle(s). If you dedicate yourself to mastering the skill of taking only the best trades, then retracement entries can skyrocket your profits.
Aha, so that’s why the Japanese are up to no good. All JPY pairs have shown interesting possible setups these last few days. This may provide some great opportunities this week.
Interesting article as usual, Krugman. To be honest, I still don’t really get it until I see more in action, but I will incorporate this technique once I get that ‘aha’ moment in my mind.
What will you cover in the Part 2? Is it still related to Retracement Entry?
[QUOTE=“wm247;567767”]Interesting article as usual, Krugman. To be honest, I still don’t really get it until I see more in action, but I will incorporate this technique once I get that ‘aha’ moment in my mind. What will you cover in the Part 2? Is it still related to Retracement Entry? [/QUOTE]
What about it don’t you get. If there is something about it that is unclear to you, chances are there are others that are unclear about it. I’m more than happy to help answer any questions about it.
Part two will cover account risk techniques. By incompatible entry techniques into your trading method, it opens up a door to a large number of trade management/capital management techniques. On f these techniques I’ve mentioned which is putting and entry at the break and at the retrace and setting it up as a “One Cancels Other” order. This is one of about half a dozen different ways to risk your capital in a trade.
So when yall enter on a retracement, do you also set an entry at the break also.
So if it retraces --> your entry gets triggered–> then you cancel the entry at the break and play the retracement trade
Or if it does not retrace and just goes in your direction --> you play the entry at the break and cancel the retracement trade?
Does anyone do this? Seems like it would help you not miss out on trades you feel are very good
For instance, i did a 50% retracement last week. It retraced to like 40% and then shot in the direction i wanted to trade. I never got in the trade and missed out on some profits bc i went for retracement. Could have still made a 1:2 RR if i had entered at the break
I remember Yves once conducted an experiment with the Swiss Army about a special EA for it, and I’m still waiting about his result. Gee, that makes me wonder. Anybody knows what happens to Yves?
I know it should be clear enough, but it hasn’t given me that ‘aha’ moment, yet. Like the bulb above my head is not on yet, and I’ve been reading and re-reading it so much, it hurts. 
It’s like reading an explanation in a Physics textbook. It should make sense, but my students seem to struggle to get it until they solve some problems first. So I kinda understand the frustration of not getting it until quite some time.
Aaron, wow man that is just incredibly insightful and thorough, thank you for the epic post!
It’s so interesting to go back to my charts now and look at all my open trades. All of a sudden it’s so obvious what kind of entry technique would have worked on each setup. I primarily trade counter-trend and your insights there are rooted in the truth, as I read it I can immediately see how it will work in my trading. I think that is the real value of it all.
You have done such an awesome job of identifying all the different scenarios and when to use what technique. Clearly, you had to earn this knowledge the hard way. From my own experience I know it’s only by revisiting losers and missed opportunities and learning from them that you come to this level of insight.
I will need to read the post again one more time and then make it my own.
Thanks man, be blessed!
As Aaron mentioned briefly a few posts ago, there is something called OCO-entries (one cancels other) which you can use to make sure you do not miss out on a trade if both a retracement entry and break of candle entry allow for a good r:r. When one of the entries is hit your other entry is cancelled automatically like you describe. Not all brokers support those kind of orders though.
What Aaron will describe in part 2 (and please correct me if i am wrong Aaron) is that you with that kind of order need to adjust your position size of each entry to fit your different SL’s due to the different stop size and r:r of each entry/trade.
Hey wm,
I’m still around. I decided to move back to the basics and to spend some time to stick it in my head before I start contributing again. What is more, I went through the whole J’s Thread Guide which I found quite good especially that video on daily routine that is meant to be reserved to members at the very end of the guide and I also read a couple more books. I never really took the time to test that Swiss Army EA but I will have a look at it one day. It’s not a priority anymore as I decided to not use the retracement strategy for now.
Yves
Hi Yves,
nice to hear from you again. I’m looking forward to seeing it once you have the chance. Things have changed quite a bit here and there, but I still want to incorporate the best of both worlds as long as it fits my strategy and personal character. Then again, we’re tackling PA albeit from different paradigm, so we really are in the same side. 
~Will
[QUOTE=“wm247;567851”] I know it should be clear enough, but it hasn’t given me that ‘aha’ moment, yet. Like the bulb above my head is not on yet, and I’ve been reading and re-reading it so much, it hurts. It’s like reading an explanation in a Physics textbook. It should make sense, but my students seem to struggle to get it until they solve some problems first. So I kinda understand the frustration of not getting it until quite some time.[/QUOTE]
No worries Willy, I want to try and help the best I can any member of the thread that doesn’t understand a certain topic or technique. Like is mentioned before, if you don’t understand it the chances are good there are others who don’t. So you answer may be others answers also. This is one of those things you will have to try on your own to find the best way to apply it to real life trading.
Get everyone, I am flying to Texas today which officially starts my business trip so I won’t have much of a presence in the forum this week. I won’t be doing any intra day trading this week but I will be checking the daily for setups at the end of the NY each day and will post any potential setups.
[QUOTE=“krugman25;567981”]Get everyone, I am flying to Texas today which officially starts my business trip so I won’t have much of a presence in the forum this week. I won’t be doing any intra day trading this week but I will be checking the daily for setups at the end of the NY each day and will post any potential setups.[/QUOTE]
Have a great trip Aaron! Thank you for the article which was a really interesting read, I am still processing it.
All the best
BA