The Trades You Make & The Stops They Take:
Well, we all understand sound trading requires the use of Protective Stops to limit our loss on a losing trade. How much thought do you put on placing those Stop Orders? My guess is not much like most traders⌠they determine the percentage or dollar amount of their account they are willing to lose on any particular trade and divide this into Pips and use this as a means of Stop Placement.
I humbly submit this concept for your review and future consideration. When was the last time you placed a trade to buy a pair only to see it trade to your Stop and knock you out of the market and spooking your nerves and you abandon your trade analysis and stare right at the chart as it turns 180 degrees and goes precisely where you traded it initially. Sound familiar?
Change Titles For Entries and Exits:
Before you place a trade, either buying or selling, your analysis should be accurate on direction. This might be assuming much if you are new to Technical Analysis⌠however, we are going with this understanding. You want to ask yourself if you were a Market Maker and your job is to provide liquidity in the markets⌠where would the resting Protective Stops be in the current market condition?
Every Swing down in price has a swing high it is anchored to and rest assured the Buy Stops on the Bears are right at or just above this Swing High. Markets are always prone to retrace and even modest retracements and retests in price are normal, but we can use this event to nail down superb trade entries.
You need to think like a Market Maker and trade right into the Stops. This flies right into the face of typical âSell after it turns downâ and âBuy after it turns upâ. Your analysis should have you trading at a Key Price level be it Support or Resistance, when it reaches this level. There should be at least a bounce in price if not an outright reversal all together. So do not be fearful of trading right into opposing trade direction.
Covering The Dealerâs Spread & Getting Your Profits Closer:
By entering into retests of known highs and lows and limiting in just beyond them is an excellent way of reducing Stop risk and allowing you to trade more lots without going over your percentage per trade risk. Not to mention, you will see the Dealerâs Spread will be covered faster since you are entering in the direction opposite of your intended trade direction. Sounds scary doesnât it? Therein lies the silver lining.
It is this fear factor that makes the Market Makers the âbad guysâ. Do you call the waiter the bad guy for taking your money to purchase that fine dinner? He is just doing his job, after all, so is the Market Maker. His job is to pair orders together and provide liquidity.
Swing Highs at Key Levels are always sold short by aggressive Bears and scalpers⌠and these traders are considered the early birds. While it can be said, the early bird gets the worm, it is the second mouse that gets the cheese!
Professional traders like to trade a retest and look for the stops to be blown out and you eventually see a price rejection occur and this is noted by a rapid move in price away from the level stops were suspected to be âhidingâ at.
This price rejection is confirmation that your trade is likely to pay off and pay off handsomely. Look at your charts and study when highs were retested right before a dramatic slide and 90% chance you will see this phenomenon occur. It goes untraded by thousands of novice and unlearned traders and maybe these same traders were in right at the previous high⌠and because of fear they rushed their stops to one pip or two just above the Swing High fearing being stopped out.
They want to keep a close stop⌠then liquidity takes their stop and they watch the price slide lower and lower and they suddenly feel sick they were right on the direction. So what do they do? They chase it and sell right into those beautiful red candles⌠only to find they sold the low and the vicious cycle begins. Sound familiar? Hello?
You want to plan your trade and plan your entry. This is what is meant by that trading proverb.
Take The Money & Run:
When you are in a profitable trade and are looking to take your profits and exit the move, consider exiting on the stops. Remember we looked for pockets of price where resting orders should be in the market with traderâs expecting protection from these âbad guysâ out to get their accounts.
Had some luck trading but giving it back before exiting the move? We can use this same strategy to take gains. Look for levels under swing lows to buy back your shorts and look for swing highs to sell your longs. The exits will typically find you leaving the market with cash and the stop nests raided and traders on the other side left holding the bag.
Do Not Fear Trading Into Opposing Directions:
When you put your trade on, it too will require a protective stop. Make sure you trade against the intended direction of your trade to enter and look for pockets under your entry for the same pockets, so a stop raiding event doesnât happen to your trade.
If you are buying into a Support level and you trusted it enough to put the trade on, what difference does it make if you buy in lower than you would have if you had waited for confirmation? Actually it is a big difference!
You will find your stops will be farther away from the market price and less likely to stop you out, since hopefully you were a patient Bull and waited for it to trade lower into a key support level. If you wait to see it bounce thinking of this as confirmation⌠you are right. It confirms you missed the low risk entry point that was just staring you right in the kisser in the form of a boldface red candle!
If you buy after the bounce you have the bounce in pips plus the initial support level and the risk under this level to consider as risk on your trade! This is not how it is done folks.
The reverse is said for shorting⌠you want the Resistance level to be solid enough to trust it going Bear tooth and claw right as it slams into the level in the form of a Bullish boldfaced candle. Practice doing this for a month or two in a Demo account and you will quickly see how you used to do it was opening yourself up to unnecessary risks and possibly overleveraging your account.
So Where Should Your Limits Be Placed?
Letâs assume the swing low price is retesting on your entry is 1.5520 and you want to buy the Cable using this smart money approach to entries. You could use a Limit at 1.5524 to 1.5520 or better. You have to remember the spread and this will be a factor in your trade. You want to capture the raid on the stops, but try not to be too fancy that you Limit too cheap and miss the move.
Basically, you want the Dealerâs Spread you will pay going into the trade to be covered at or under the Swing low price and conversely at or above the swing high price. Donât be too greedy or frugal and fear taking on risk in the trade. You will still see price likely trade a few pips against you before covering the spread and lowering your blood pressure as it steadily moves in your direction.
If you miss the entry⌠chalk it up as study time. Unless you get a low risk Pivot entry higher up with supportive technicals converging at the same Pivot level. Chasing it never works⌠trade like a Professional.
So How Are Your Entries Confirmed?
Remember youâre entering right when the candle will be the most bearish looking on long entries and most bullish looking on short entries, this will be scary until you get used to trading the method. Your charts, when you look at them in hindsight have those powerful looking hammers with long wicks at either end. What do you suppose those hammers and long legged dojis were before forming?
Before those long wicks appear they are those boldfaced candles you entered at or near the extreme end of! Welcome to Professional Smart Money Entry folks!
Now do some maturing and review your past trades and see where you entered and how you might have been able to better place your orders to reduce risk, increase profit potential and cover the Dealerâs Spread more rapidly so you can start bringing those Protective Stops of yours closer to breakeven!
Think like a Professional. Good luck and Good trading!
