Here in the Euro we can see a high quality pin bar form at a key horizontal and diagonal trend line and while you can’t see it, it was also the 21EMA on the daily. This trade was with the trend and had pulled back to the last swing high. It was a really nice looking setup, but if you zoom out to the daily or weekly you can see it is getting very close to a key S/R area in the 1.3700 area. This doesn’t make it un-tradable, but it means you would need to consider it when analyzing trade risk and be diligent to manage the trade correctly.
Two variations of this trade could have been to enter at the break or retracement of the pinbar and get out at 1.3640.
A second, riskier trade would have been moving to BE once price hit 1.3640 in hopes of the strong momentum breaking through the major S/R area. Once price broke through this area and held, your SL could be moved to 1.3640 and the trade allowed to run. The risk of getting stopped out would be higher but your reward could be multiple times larger. Trades like these can provide RR scenarios of 1:5 - 1:10.
We know the trade failed which is what I really what I wanted to talk about. Often talked about is the benefit of “set it and forget it”, while this sounds nice, it isn’t always the best way to trade. I like to strike a balance between that and being passive-defensive in my trade. Often times when price moves against your trade it doesn’t happen suddenly but can fire off warning signals. These signals can help you close part of your position, or the entire trade. This specific trade fired off a large bearish pinbar just above the S/R area where we entered. It was accompanied by very high volume tipping us off to a struggle between bulls and bears, and that bears won that session. While we still have key S/R to buffer our SL, we are also actively watching the price action story unfold and may be time to get pro active in our trade. If you decided to let your trade run, 2 candles later another large pin bar formed, and actually made a double top. This was the market giving you a second chance to partially close your position to minimize capital being risked, or get out of the trade all together.
I wanted to use this recent trade to say something that is often taught against(I like going against the grain, haha). If you would have followed many mainstream teachers, this would have absolutely been a loss. A small amount teach this type of trading as advanced topics, and well let you in on their secrets for a fee.
If we allow price action at key levels to get us into a trade, why would we not let that same price story get us out of a trade going sour? This is a topic that has to be approached very delicately because people tend to get into ditches. In one ditch a personal will never touch a trade, no matter how bad it is looking. In the other hand people sabotage their trade by messing with it too much. For a while, I had a sticky note on my monitor that said “DONT SABOTAGE YOUR TRADES!”. This is because I believe in the benefit of being active in my trades, but it can lead to over-trading or over-managing. You have to learn that proper balance of self control as a trader.
The best way I can put it is this, enter a trade with a pre-plan, every step laid out, and plan to not touch your trade at all. You have your key areas laid out where you will take profit and move stop losses, and plan to stick to it like a robot. But periodically keep an eye on how your trade is unfolding, and intervene only as a lifeline to save your capital. In the same strictness you use to enter PA trades, use that same strictness to get out of them. That means only get out of a trade if the warnings are very obvious. After practicing this type of trade management, you will find the majority of the time price moves to where you stop had been placed.
I began using this type of passive-defensive trading all the way back when I started learning PA. It developed along side of me learning how to enter trades, so it has just become a part of my trading style. For others who have only “set it and forget it”, it may take a while to learn the right times to get out, and you may end up getting out of a couple winners. It will just take practice and making mistakes to start reaping the benefits of it. This is also the same technique I use to increase my position, also called pyramiding into a trade. Most people don’t know this but I will tell a little secret here today, I almost never set take profit limits. Whether I set a TP or not is trade specific, but there are trades where watching what price action does during the trade can help you bag a lot more profit. While this is definitely an advanced topic, I would like to write an in depth article on the topic in the near future. This will be coupled with articles on trade psychology, because this style of defensive trading will hurt you if you don’t have the correct mindset when interacting with your trades.
