Stop and/or Reverse: Solving the Dichotomy...

Let me start by stating that I'm looking for input from experienced traders. I have no wish to end up with dozens of posts telling me I need MACD, RSI, Stochs blah-de-blah, de-blah...

I am also aware of Jacko's way of trading (so no need to point me in that direction, either) as it isn't relevant to this discussion.

At this point, I would prefer reasoned discussion from traders who, primarily, trade 4-hr charts and upwards. As the question is opened up, it will be apparent that scalpers and others who limit their horizons to 10- or 20 pips may not be looking for the same answers as I am. This may be approaching the question from a blinkered point-of-view but I am basically looking for a longer-term perspective on this, even if the answers mean adopting a short-term perspective on the market.

I understand that this may sound arrogant but this is my thread and I'm entitled to make the rules. So, here's the question and the foundation of my dichotomy.

Firstly, I trade the trend (as I see it on the Daily chart) and only base my trades on Support and Resistance. Sometimes my trades are based on J16-style price action and at other times I place blind limit orders at key points (as I define them) on the chart. Having learned the folly of trading without some sort of disaster stop, I assess my position size on S/R and place my stops accordingly. My usual approach to risk is to allow a maximum of 5% overall
and I base my lot sizing on that. I am aware that this is higher than is normally recommended but, having been around the block a few times, I am fully in control of this side of my trading and accept the inherent risks involved.

I normally split the trades up and enter with minimum lots at each Support or Resistance level as price moves down or up; I guess we could call this 'averaging in'. I have been trading this way for some time now and am comfortable with it, but there is one aspect that has been eating away at me and this is the dichotomy that needs resolving.

Due to the way that I arrive at my levels I have quite definite and, historically, accurate Take Profit targets. As I also rarely take partial profits at these points I'm normally trading all-in and all-out. So the question that is searching for an answer is this:

I'm trading an uptrend and I have a clearly defined TP point on my chart, I must assume that at that point there will be sufficient Resistance to cause a reversal, albeit temporary. As price gets nearer, two or three things are likely to happen; (1) price runs straight to my TP and I'm out - if it breaks through and continues going I'll reassess later and treat that level as potential Support; (2) price starts to show signs of exhaustion in which case I'll tighten up my stop and (3) price hits my TP but shows signs of failing to maintain upward momentum.

The nub of my dichotomy is this: A stop is placed in the belief that the direction of the trade has, at that point, failed to be sustained and that market conditions have changed. In this case, what prevents me trading the retracement? There have been too many instances of me watching price travel 100s of pips back down to a potential Support level while I'm on the sidelines. Is it common sense or fear? Too strong a directional bias or an inability to react to the market?

So, do I need to address this as a weakness in my trading or sit back and keep doing what I'm doing now? To get some idea of my trading so far, have a look at the stats on Myfxbook. The EURUSD is live and the Alpari_Demo2 is what is says on the tin. Both accounts are traded in exactly the same manner, ie only going Long at Support in confirmed uptrends and vice-versa in confirmed downtrends. Hardly any contrarian trades can be seen in either of these two accounts.

One technique I've considered is, on the face of it, quite simple. Let's assume I'm Long EURUSD and I'm approaching a Resistance area. A recent example is when price twice hit the 1.5050 area there were two retracements of around 300+ pips in the first instance, at the end of October, and circa 200 pips most recently. If I moved my trail up near my TP then in effect I'm placing a Sell order to take me out of the market. All that does is close my trade and banks my profit. Is there any logic in matching it with another Sell order so I have a position ready to trade the retracement?

This is what has been niggling away in the back of my mind but I've become so fanatical about 'only trade the trend' that I feel I'm becoming blinded to other ways to grow the account.

In my opinion, you're doing too well to be thinking about changing your approach. I'd consider another dedicated account for another pair to be traded the same way. A much smaller account that could be increased as you become more intimate with the pair, as you are with the EUR/USD. This might satisfy that urge to be in the market more.

If you must consider contra-trend trades, think about:
a) a modest TP
b) only one attempt per pullback. Scaling in would be okay, but consider the sum of scaled-in entries to be one position representing your one attempt. When this aggregate position is closed, either in profit or not, you are through until the trend resumes. Obviously if your analysis tells you that the trend has changed then your trading bias will as well and you may now trade the other direction with guns blazing.
c) since your contra trend horizon will be shorter, maybe you should base those trades on a smaller time frame. If you currently use a daily to find the trend along with the 4hr and 1hr to refine your entries and exits, use a 4hr to start your analysis along with a one hour and 15 min to locate entries and exits.

Of course this is only opinion. It's generally how I look at my contra-trend trades and may not appeal to you at all.

With all that said, and considering your current results, I'd encourage you to do what you are doing, but maybe do a little more of it (and only because you're trying to build your account a little faster) by slowly acquainting yourself with another pair by way of a smaller, dedicated account. You obviously have a handle on the EUR/USD and its "personality".

Be careful, Peter. Your current results are enviable.

That's the problem, I'm not sure I want to change but the better I get at chart reading the more the opportunities stand out. There is also the pure logic of contra-trend trading short at Resistance, for example. I've learned to accept that my entries at support (for example) have a 50/50 chance of failing at first touch and I have adapted to suit. What I think I'm looking for is confirmation of that logic. A stop loss for any trade is where you think the trend is likely to reverse; doesn't it make sense to position yourself to take advantage of any substantial reversal? It isn't the case that I necessarily want to be in the market more; it's more a case of achieving profits at times when I might otherwise be on the sidelines, if that makes sense. This is exactly how my brain has been thinking. Lower risk entries (in terms of position sizing) and near-term targets. No add-in trades, as a rule. The second demo account was to play around but I have people following the account and I suspect some are treating it like a signal service. If I do try this I'll maybe setup a fresh demo with a third b roker and keep the stats to myself.

Well done Bill, I knew I could rely on you to give me feedback .

Jmho,

Taking profits along the way, and tightening your exits when approaching your target, are trade modifications already set into your MO, trying to incorporate smaller swing retracement trades where you would be exiting and reversing the original trade is not something I think your want to add, at least into your original method.

Your original setup I'm sure has a good R;R, but it's to no effect if your cutting the trade short.

All that being said, the more pips you can squeeze out of a complete wave/leg the better, as in trading the impulse and corrections both ways inside the whole, but you open the risk of getting whip-sawed if too aggressive.

Once you have a good base established for your trade and in profit, the mental warfare is not cutting too quick, passed is the fear of the trade going against you, which will be repeated several times when reversing too and fro.

You must decide the time frame for each trade and trade it accordingly, if you are long on the larger, then short the smaller corrections for additional profits in a separate account, or reduce the view and focus on the individual moves, but what will stop you from then focusing on the smaller subset of waves within that? What you do not want to do is ending up trading noise.

Pick your optimal timeframe and risk level that suits you and make some bank!

regards

Hi Peter
Clifford Bennett wrote a book, Warrier Traders, in which he defines two types of traders. It appears your an Archer thinking of becoming bit of a swordsman. They act in two different markets (Trend and Ranging). Both are effective, but I wonder of one can be both at the same time. It would mean you must know your market intimately. Whichever one chooses they must strive to be the best.

Here's Bennetts definition of the two types.

ARCHERS AND SWORDSMEN
The mechanism for attaining the further status of warrior is
either as a swordsman, if a range trader, or an archer, if a trend
trader.
Swordsmen
The way of the swordsman is akin to that of the range trader.
The swordsman participates in the most immediate way, where
constant movements of varying forms—such as thrust (trade),
evade (take a loss), and the death blow (closing of the profitable
trade)—are a continuous blur. Movement and reaction are so
fast that the rational mind is almost eclipsed and the decision
required at such speed is almost subconscious.
129
CHOOSE YOUR WEAPON
TABLE 10.1 Determining Your Style of Trading
Range Trader
Characteristics:
Left-brained; practical and methodical; steady builder of wealth; buys cheap
and sells when a profit is seen; strong work ethic; not interested in the forest,
just the trees; has trouble dealing with losses,believes nobody went broke tak-
ing a profit.
Trend Trader
Characteristics:
Right-brained; creative and artistic; looking for a huge lift in wealth; does not
really care what the price is when buying as long as it’s going up; strong perfor-
mance ethic; can see only the forest; losses are not important as big profits are
coming; believes if you are on to a good thing,stick with it.Typically, the futures pit (the floor of a futures-trading ex-
change) is the very physical place where the ultimate swords-
men compete. In this environment of furious action, the top pit
tradersoften find they depend on a form of intuition, height-
ened to a reflex and referred to as “gut feeling.” What makes
great pit traders is their willingness to give in and commit to gut
feeling.
Going with your gut feeling is not as easy as it sounds, espe-
cially if you are educated and knowledgeable. Perhaps this is
why many a great pit trader is a streetwise person with little for-
mal education. Formally educated people can be at a disadvan-
tage in the pit simply because they have been bombarded with
reductionist philosophy techniques for years.
While futures markets may be the environment where the
action is so intense as to demand ultimate discipline, confidence,
and technique, warrior traders can be found in every market.
The holistic approach to life suggested by Eastern philoso-
phy was also followed by ancient swordsmen. After crafting a
weapon and refining a fighting style,
swordsmen enter a conflict in an almost
unconscious and forgetful state. I don’t
mean unconscious in the sense of being
asleep or knocked out; rather, I mean
being not overly self-conscious and not
relying on deductive or rational reason-
ing in order to interpret everything. After
developing the independent aspects of
battle, such as weapons and technique,
swordsmen then call on something else
and allow an innate process of action
without thought to take over. Only in this
way do swordsmen remain fast enough to sustain constant and
rapid victories over their enemies and remain standing at the
end of the battle.
WARRIOR IN BATTLE
130
After developing the
independent aspects
of battle such as
weapons and technique,
swordsmen then call
on something else
and allow an innate
process of action
without thought to
take over.This is what many swordsmen traders have felt on entering
and exiting their best trades, their biggest wins. They are often
the least logical, yet the warrior feels in some way compelled to
act—to sell or to buy. At other times, the warrior aggressively
attacks the market in a most committed way. The point is that
warrior trading, to a significant degree, requires traders to let go
and listen to their intuition or gut feeling and to act in ways that
may be different from the usual or logically thought-out plan.
Archers
Archers are similar to trend traders. They cover the big picture
from a distant observation post that allows them a clear view of
the overall battle not afforded to swordsmen.
Archers act less frequently than swordsmen but do so equally
decisively. Archers have a limited amount of ammunition, and it
takes time to reload; therefore, they must use the arrow when it
will be most effective. Similarly, trend traders, in attempting to
capture large market moves, must avoid the usual volatility by
having wider stop limits. This means that trend traders can lose
their investment through a fewer number of trades than is the
case for swordsmen. It is important for the archer to be out of
the market as much as possible during nontrending periods.
In the markets, swordsmen are active for the larger part of
the battle—approximately 85 percent. Archers are active for
perhaps only 15 percent of the battle, but the archer’s input can
be as decisive as that of the swordsman. (As already highlighted,
markets tend to consolidate for 85 percent of the time and trend
for 15 percent of the time.) Both the swordsman and the archer
participate in the same conflict and can subsequently get in each
other’s way, causing confusion for brief moments. However,
both have the instinct and ability to assess the situation and with-
draw or persist. Consideration of this point is beneficial to both
archers and swordsmen.
131
CHOOSE YOUR WEAPONWhile the secret behind the success of swordsmen is to be
constant, the secret for the archer is to identify and choose the
time of attack and the timing of the release of the shot. Don’t be
fooled, however; archers must be in a constant state of readiness
as they wait for that right moment. The ultimate warrior archer
also, of course, lets go of conscious involvement to the point
where the shot “releases itself.”
This ability—and believe me, it will take a long time and a lot
of effort to attain—should be the goal of all trend traders. Great
trend traders can, on occasion, almost “feel” a trend even before
it has begun. Warrior archers will respond with lightning speed
to confirmation as it unfolds on the battlefield, in terms of actual
price action, because such development has usually already
been considered in advance. Many other trend traders, those
would-be archers, will have missed the opportunity. They have
had to take aim clumsily, instead of having been in position with
a sense of knowing, as was the case for the warrior.
This is the task of the warrior: to know what your target is
going to do even before the target itself does. This has been a
component of the art of war for countless centuries, and it is no
less the case in modern markets. In understanding your quarry
and how they think, the goal is always to maintain an accurate
perception of the terrain so as to grasp the likely unfolding of
events. This allows one to be in position ahead of time, as either
an archer or a swordsman.

Peter

The only reason I thought my two cents might be useful, is that I'm on a very similar road. I tread very lightly on my contra-trades. The way I explained it to someone else: If I can get a small piece against the trend, I settle for whatever I get quickly and consider myself a lucky thief without going back for more.

BTW, when you scale in, do you use the same price for all your stops? Or are your stops at different points on the chart? And I'm assuming that your 5% risk is the sum of all entries.


mrgreen

I'd like to see your library. You always come up with very good stuff.

A couple of points to discuss here. If I understand your comments I should make it clear that I don't take partial profits nor, at the moment, am I a great believer in getting to BE too quickly. I was advised against partial-profit taking quite early on in my trading. See this thread. Neither am I considering hedging existing trades as I realise this is full of its own problems. This is nearer what I'm seeking the answer to. Short-term contrarian trades at pre-defined S/R areas. My studies of the charts have given me a solid way of setting my S/R levels and I need to make the most of this. I suspect that I've traded so long now with a very low failure rate that I've lost the ability to accept a higher level of losing trades.

Maybe the answer is as simple as that. I recognise your point but each trade would be a separate entity when all existing trades are closed at their targets. As you rightly say I should stick to my key TFs - principally Daily & 4-hr.

Thanks for your input. Maybe this chart will explain what I'm looking to exploit.

----------

OK, I've taken a copy of this and will re-read it at my greater leisure but I get the point of the comment. Thanks.

I agree that I'm mostly Archer but when I see the sort of 'Range' shown in the Cable image above I have to ask myself where the dividing line is, exactly.

Most of the traders in the major pairs threads would fall into the Swordsman profile but I still feel that 600 pips (potentially) or even a conservative target of 25-50% of the range would still allow me to be an Archer in this context.

I may be back once I've absorbed the lesson more fully.

I have one stop for all levels. Bearing in mind that my failure points are often based on Monthly/weekly S/R levels and my intermediate entries are often based an Daily S/R levels. So, if my failure stop allows for, say, 10 lots I will set 1-lot limit buys at each Daily level. Obviously, if you do the math, my overall exposure is actually decreasing at each additional entry as the average price is X pips nearer my stop.

If price holds at one of the Daily levels and price resumes the core trend, I will look at pyramiding in as price climbs back up the chart.

Thinking about this, as I put it all on paper, maybe I need to address my basic approach completely.

I suspect that I'm becoming blinkered to any alternative way of trading as a result of the success I'm currently enjoying. I suppose in the back of my mind is the memory of the first margin call. Perhaps I'm worried about the old complacency thing that caused me to blow that account.

We're always being reminded that methods come and go but S/R trading seems so solid, when approached correctly, but I still feel there is a part of the jigsaw I haven't quite managed to fit into the puzzle. Does that make sense?

Interesting results, Peter. As steady as that equity curve is going north, how much was the largest drawdown at any point over the past 11 months? Indeed, closed trades can be deceiving.

Alas, I think that trying to call tops and bottoms is impossible with charts.

You're not the first to ask this question. As I'm often holding trades that are running negative for long periods there is no definitive answer I can give you. All I can say is that over the period shown (ie Jan 09 to today) I have never had a failure stop hit.

The maximum % that I've been holding onto prior to the trend re-establishing itself is approx 6%. From memory I was within 25-35 pips of being stopped out on all trades that I held at that time. Currently, I have 6 open trades on the EUR of which the lowest priced entries were placed straddling the 1.4835 level. Four are in profit and the drawdown overall is less than 1%. From the earliest entry, based on 5%, I had 31 lots to play with and, in fact, that's exactly how many lots are in play.

The question that I raised was not to elicit critiques of what I'm doing now but to find ways of exploiting contra-trend trades and the wisdom of even contemplating it. Your comment may well be valid.