Post entry….. Part 1

The real game starts post entry when you are staring at the price ticking up and down and your brain freaks you out with it’s talking. A majority of traders end up exiting good trades early and exiting bad trades late causing a lot of financial and psychological damage because of the mind’s chatter post entry.

There are so many psychological evidences to prove that the unorganized mind always tries to make you a loser, especially in  performance based professions like sports and trading. I’m not going into details of that as that is out of scope of this article. If you have a few months of trading experience, you understand what I’m saying.

• If you are good with the analysis part before the entry, managing the trade post entry is fun and exciting provided you have the right set of expectations towards the market. Let me phrase some of them here.

• No matter how good the setup looks, it always has the potential to fail when candles start printing at the hard right edge of the chart post entry. So make sure you protect your downside both financially and psychologically.

• Every single tick post entry will not move in your favor. Don’t expect that to happen as it totally screws up your mind when market moves against you which in turn effects every  decision you take there after.  Deal with candles, not with ticks. I would like to talk a bit more detail about this point later. This is one of the reasons why I fell in love with 5min. for day trading(leaving 3min.) , Hourly charts for swing trading.

• If you watch every single tick, you trade like a dick. This is again in tune with the previous point. Stop dealing with ticks. Deal with candles. Once you decide on that, you don’t have any business with the charts until the candle closes.

• You can’t trade the range bound markets like that of the trends and vice versa. Ranging markets are there to rip of trend following approaches.Trends are there to rip of those traders who always like to fade the breaks outs and weak swings at new highs in uptrends or new lows in downtrends (very common habit). Where you look for trades, what kind of setups, the trade management  and even setting the targets differ in both these environments. If you are finding it hard to trade one of them, then don’t trade.

• You don’t need to pick tops and bottoms. In fact, you cannot consistently pick them. That happens once in a while and consider that as an accidental event rather than your skill so that you will have right expectations towards the next trade. If you make that as the primary objective of the trade plan, you are doomed. Trust me, I was there and I really had very very bad experiences with that. In stead, focus on identifying the right setups at the right areas in the right environment, accept that there will always be some risk associated with every single trade and then give yourself permission to lose in few trades. Contain those risks by proper position sizing and that opens the doors for your further development. Once all these things are settled, then start working on better entries with limit orders into your setups for reduced risk.

• Be conservative with the targets. When I say conservative, I don’t mean placing targets at 1R, 2R or some crappy tick based targets. Leave that kind of target to scalpers. Know the potential of the trade and place the target at proper levels from the left of the chart. At least take 3/4 th of the position with a limit exit and ride the remaining 1/4 th with a trailing stop.  Some say half and half position management. It’s totally subjective and you have to choose which one keeps your mind at peace.

• Make survival as your primary objective of risk and money management. If you survive, you can take the next trade. But if you don’t, I don’t need to say the rest.

I want to give two more bullet points that talks about my approach to two different environments. I actually realized recently that I made those mental models unconsciously while talking to one of my friends. Here they are…

• In a trending market, I trade the impulsive swings of the short term trend which starts at the end of the corrective pullbacks and complex pullbacks, targeting the immediate minor supply/demand level or HTF S/R level. ie. I don’t want to hold positions during deep pullbacks in a trending market.... PB and CPB

• In a ranging market, I predominantly look for BOFs  of the range boundaries targeting the other boundary with conservative trade management (ie. with a loose trailing stop), and BPBs when the breakout is strong and price got accepted after the breakout beyond the boundary.  I manage TST setups aggressively (with aggressive stop trailing) targeting the immediate swing highs and lows to the left of the trade entry....BOF and BPB.

So every trading decision that I take post entry will be in tune with one of the above two points depending on the environment that the market is in.

The signal candle and the trigger candle

LWP :-

LWP is the price level in our setup location where you expect the stop losses of those traders who are fighting the high probability direction we have predicted are going to trigger.

The definition here is a bit subjective and is a bit hard to understand and apply by a trader who is new to PA trading.  So I would like to elaborate a bit about this.

I have been repeatedly saying like a humming bird that there are four important things to evaluate the odds in the favor of a swing trade.

1. Short term Bias. This is a must. If the bias is not clear, there is no point in looking for a trade.

2. Corrective move against the bias to fade. I have already explained how we can identify whether the swing is corrective or impulsive on the right side of the chart using the bar by bar candlestick analysis. This corrective move confirms that the market is weak against the bias and gives enough confidence to take a trade in the direction of the bias. It doesn’t mean that the pullbacks cannot be impulsive. They can be, but that rarely happens. It often gives a CPB or some sort of a trap type entry if the first leg is impulsive in the move against the short term bias. It just means that the odds are in the favor of the trade when the move against the bias is corrective.

3. Price level. The supply/demand level which can provide some orderflow in the direction of the bias to stop and reverse the corrective move.

If you are clear with the things so far, congratulations. You have done a great job and are few steps away from placing the entry order.

Now lets move on to the next step of the above procedure, Price level. When market corrects to the price level, the first candle that shows strength in the direction of the bias or/and weakness against the bias is known as the signal candle.

Signal Candle:-

The candle that closes strongly in the direction of the bias or weakly against the bias, at the price level is a signal candle. Like a pin bar, candles that close near high/low, inside bars etc. etc.

LWP:-

If the bias is up, the high of the signal bar is the LWP. If the bias is down, the low of the signal bar is the LWP.

Trigger Candle :-

The candle that triggers the stop entry order that is placed just above/below the LWP is known as the trigger candle. Once that entry is triggered, the low/high of the signal candle becomes the stop. In stead of triggering the entry order, if the market breaks the other extreme of the signal candle, better to cancel the order and wait for another signal candle.

So in short, Signal candle is the one that forms the LWP. Trigger candle is the one that breaks the LWP.

Maintain a feel for the market

I got a fantastic entry in today’s crude session. Though the profits are ordinary, the entry itself reminded me how important it is to maintain a feel for the market flow. I can say, it is an add on to the active trade management. Lets look at some charts.

Context:-

Market is trading in a sideways environment. Though it approached the range resistance with strength, buy orders were totally absorbed by the resistance.  Market immediately got rejected after the breaking the resistance.

Future Bias:-

No signs of continuation after the breakout. As per the third principle of future bias, market continues to trade in the sideways environment.

Setup:-

As the trade must be in the direction of the future bias, I will take a BOF trade when market fails to continue to the upside in the second attempt. The high formed after the breakout is the level I am interested to look closely now.

Lets look at LTF chart to watch price interaction with the price level.

As expected, price failed to continue in the second attempt. Its time to prepare my entry parameters.

Stop – 2836

LWP- 2826

T1 -2822

Risk to reward is not favorable for if the entry is with the stop order and hence , I must only enter into this trade if I can workout a better entry with limit order before crossing the LWP. So, I didn’t place the stop entry.

I love to work entries in the areas of rejection. As of now, 2829-2834 is the area that I can look to play with limit orders when price approaches it with weakness. Breaking the 2834-2836 level will invalidate my premise.

Lets add few more LTF candles to the chart.

As expected, there was weakness while approaching the rejection level. My entry was at 2832. It got hit but it didn’t get a fill . But the LWP was not yet triggered. As I am not allowed to enter with a stop order, I moved my limit entry order to 2831 (2832 is the new rejection level now) and then it got a fill. I would have canceled this entry order it market crosses the LWP before my entry gets a fill.

The outcome of the trade is as follows

The profits of the trade are ordinary, but I was very much excited with the entry and it went into my books.

If I didn’t feel the price action at that time, I would have missed it.
If I didn’t have limit entry strategy in my arsenal, I would have missed it.
If I hesitated to drag the entry order down by a tick ( which is again possible with the feel for price action), I would have missed it.

Don’t look for setups. Maintain situational awareness and feel the price action. Market will tell you what to do to hop on to a winning trade.

(Courtesy - JCK)

The short term bias

1. Levels of Supply and Demand
2. The Philosophy
3. Impulsive vs corrective moves.

The next and the very important thing in analyzing a  chart of any time frame is forming a bias. If you are not good at forming a bias, there is no reason to trade the live markets.

So what is a bias? 

Simple… Bias is the high probable future direction of the market. So the real question is how to define it when the candles are printing at the hard

right edge. First I need to talk about trend to make it a bit clear.

Trend:-

According to the classical technical analysis, every timeframe does have three types of trends.

1. Long term
2. Medium term trend and
3. Short term.

The time frame you have picked can be weekly (or) daily (or) 4H (or) H (or) 5min. (or) someother time frame. I only mentioned these five time frames as they are the ones that are predominantly used by the traders and the candle closes, tails in those time frames convey some information. I got
fixed to the 5min chart to day trade and hourly chart to swing trade. Even the way I trade the 5min chart can be considered as swing trading.

What is swing trading ?

The type of trading where you look to catch the impulsive swings in the short term trend, in a given timeframe is known as swing trading.

Al brooks mentions in one of his videos as any trade that has at least 1:2 risk to reward can be considered as a swing trade. That definition is a bit

vague. Lets stick to the one I have given. In reality, swing trades does have a nice risk to reward if you enter at the start of the move.

The remaining two types of trends, namely Long term and the Medium term trends are used for positional trading which I have never touched. So I am not the right person to talk about them.

I hope you have practiced identifying the impulsive and the corrective moves. If you haven’t please stop reading this article , get some hindsight charts, and practice as follows.

Identify the swing highs and lows in the chart.

Name them with alphabets from left to right.

Then name whether the swing between a swing high and a swing low is impulsive or corrective. There is no right or wrong. Go with the eye. Impulsive moves have candles that has strong closes and fewer tails, with great momentum. Corrective swings will have weak closes, lot of tails and decelerating momentum.  Don’t just call a swing as corrective just because the momentum is decelerating. Check the candle closes and tails as well.

Once you are good at identifying the impulsive and corrective moves, identifying the short term bias is simple.

bias

Once the bias is formed, wait for a corrective move against that bias, and fade it.

Let us say the short term bias is up, wait until a down move starts in the TTF chart, identify the demand levels, confirm that the move is corrective with the help of momentum, candle close and tail analysis (I will talk about this in a separate article), fade the move near the level. Or look for a bear trap to enter long.

These are the examples that I have gathered from the recent charts. I hope I made everything clear here. These things just simplifies a lot of crap about forming a short term bias. 

Just focus on the last two to three swings to form a short term bias. I will try to elaborate on this topic with examples if I find any.

Candlestick Analysis

I have mentioned in one of my previous articles that in swing trading, we should have  clarity on 4 important things before considering a trade. Namely,

Short term bias.
Corrective move to fade.
Price level to look for an entry.
Stop and Targets

I have already covered about short term bias and price levels in my previous article. I hope you already know how to name a swing as impulsive or corrective in hindsight charts. So far, so good.

The real problem comes in naming a swing as corrective or impulsive when the chart is printing at the hard right edge. As we analyse the market information in terms of candles, it makes sense to know how the candles in a corrective move looks like, and how the candles in an impulsive move looks like.

Don’t expect some mambo jumbo here. It’s pretty straight forward. The candles in an impulsive move are strong and the candles in a corrective move are weak. 

So what information can we get from a candle to know that it is strong or weak ?

Market information during a particular period of time (timeframe) will be represented by tails, close and the range of the candle. Volume is the 4th dimension which I don’t know how to use. So, my focus will be on the first three.

Remember, try to read the candle only after the close of the candle because the whole shape of the candle changes in the last few seconds most of the time. A candle that was looking like a hammer at 4 and half minute suddenly changes like a strong close bearish bar at the time of it’s close. So it’s always better to wait for the candle close when you are trading a liquid instrument.


Don’t think that it takes a lot of time to read all those things from a candle. It just takes not more than 5-10 seconds once you know what things to look for.

Let us say that the short term bias is down, the market is moving up and most of the candles  are weakly bullish or strongly bearish in it. We can consider that as a corrective swing and can start looking to fade it when it reaches the entry level. If the premise for the short is valid, the down move that we are trading will have strong bearish or weak bullish candles.

Look for strength in the market to form the bias, and weakness to consider the entry.

I thought of giving some examples for this article, but no matter how detailed I explain things, those charts will be hindsight. You will learn to read the candles better only when you start applying things in the live markets. Use market replay for practice. Remember, it is just a framework to operate in the market and to make informed decisions, not fixed rules.