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What Is Wrong With This Entry?
The following is an excerpt from an
email Q&A session, which offers a great lesson for us all to share - the
importance of correctly assessing the bias.
Email excerpt:
...
My problem is I get stopped out again and again most of the time before price
goes in my direction. I have a 20 EMA on my charts and it seems that price
bounces off it most of the time to retest the lows. I have thought about waiting
for strength to enter the market and attempt entry only on the first
retracement, but as per your teachings on fading weakness that's normally too
late to enter after strength (even if it is on the lower timeframe?)
Am I wrong in searching for answers in my entry timing? Should I rather be
looking at making my momentum reads more accurate? Or is it my momentum reads on
the lower timeframe that takes place inside my entry formations that need
attention?
I attach an example of a Eur trade that illustrates my problem. It is a breakout
failure that
I wanted to trade. After the third attempt at the lows it took off in my
intended direction without me after I took two losses attempting to enter. I did
not enter this third attempt since I then doubted it would continue higher.
Any ideas on what I can focus on to improve my entry timing?
Your guidance is greatly appreciated
Regards
Stan
Attached
images:
5 min
chart: (click on the image to open a larger copy in your browser)
1 min
chart: (click on the image to open a larger copy in your browser)
Response:
Hi Stan,
Great
question.
Accepting
that I have only one trade sequence to use in assessing your current challenges,
hopefully the following response will prove worthy of such a great question, and provide you with some insights for the way forward.
My
immediate thoughts on seeing your chart is that... you don't have an entry
problem.
You have
a problem identifying the bias (the likely path for future price action, or the
future trend direction, or whatever other term you like), and possibly a reentry (psych) problem.
Let's
look at bias first.
Why do I
say this is a bias problem, rather than an entry problem? Because if your
assessment of bias is right, you can be quite imperfect with your entry and
still have opportunity to profit. Whereas if your assessment of bias is wrong,
even a most technically perfect entry will still place you in threat of a
drawdown and likely loss.
Here's an
example demonstrating what I mean by this...
Let's
move now to your example.
We'll
begin by blanking out all other price action and examining the quality of your entries.
(Note: my candles look slightly different to yours, which is just the pip or two
difference between your spot forex broker and the fx futures. The concepts
discussed are still applicable though).
From a
technical perspective, both entries are very similar in technique. And both are
a great method of entering the market at a point of short-term bullish
sentiment, which was evidenced by price rallying for the following couple of
candles.
Had such
an entry technique been used with a clear bullish bias, it would likely have
secured you an early low-risk entry into a high probability move, as bullish
sentiment and orderflow carried your trade through to greater profits.
The
problem then is not entry (which you're already good at)... but when to make
your entry decision.
And this
is a problem of assessing the bias for future price action, or the path of least
resistance (there's too many names for this concept!!!).
Let's
look at the market at the time of your entry attempts, through your higher
timeframe 5 min chart.
You
correctly identified slowing momentum, as price broke the support in the
vicinity of 1.3470.
The
question then is, where is price likely to go from here. Weakness is clearly
displayed after the point of breakout, but is that likely to lead to a reversal
long? Or is a rally more likely to bring in more selling, leading to a
continuation lower?
Your
analysis clearly expected a breakout failure and reversal.
Your
entry technique expertly picked a point at which short-term orderflow would be
bullish, getting your trade off to a good start. Continuation higher though
(eventually forming a reversal), will require fresh bullish orderflow. This will
require a wider following... with other timeframe participants also switching to
a bullish sentiment.
Your
assessment of bias will then depend on whether you feel that a push higher will
bring in sufficient new bulls, or cause sufficient numbers of shorts to cover
their position, to overcome any new selling.
Let's see
how any pullback might look to traders of the 5 or 15 min charts.
So, is a
rally likely to lead to wider bullish support?
No.
Given the
bullish pressure that's occurring at or below 1.3470, and the likely bearish
pressure that will occur above, and in the absence of any external event which changes the
supply/demand dynamics of the market, I'd expect that price would most likely
settle into a period of sideways consolidation.
(Of
course... it did eventually end up meeting your expectations... but that's for
another reason discussed towards the end of the article.)
My
expectation is for sideways ranging action. The higher probability trades would
be the short entries at the top of consolidation. Longs (if taken) would be managed very
aggressively.
What
would give me confidence in the long direction? I typically will require either
a confirmation of change of trend, or some evidence of strength in the long
direction and weakness in the bearish direction.
Until
then... trust the trend. (YTC PAT readers... refer to the "future trend -
simplified" bonus video which discusses this a little more)
This is
exactly the scenario you mentioned in your email ("I have thought about
waiting for strength to enter the market and attempt entry only on the first
retracement, but as per your teachings on fading weakness that's normally too
late to enter after strength (even if it is on the lower timeframe ?)"). I'm
not sure why you thought I don't recommend that. Identify strength in the
bullish direction. Fade the weakness on the pullback. It's a great plan.
(Side
note: Momentum analysis is much more important on your trading timeframe
(5-min), as demonstrated above. In your example charts you have not referred to
this chart at all, instead focusing solely on the lower timeframe entry chart.
Consider whether your focus is too much on the lower timeframe.)
Does this
mean your attempted breakout failure trades (long) were invalid?
No. The
breakout did occur and price did show weakness in the bearish direction.
Your
entries are valid. I may well have taken them myself.
However,
given the context within which they occurred they should either have been
treated as a higher risk scalp back to value, or passed entirely, with
preference given to pullback entries short (BPB trades, for YTC PAT readers) as the short-term bullish move
failed. And... if we do discover that price rallies higher with strength and we
missed the move, so be it. Reassess your bias and look for the next opportunity;
watch for a weaker pullback and an entry long.
A couple
of points to wrap up.
1.
Re-entry... I mentioned that as a potential problem as well, given your comment
that you didn't have the confidence to take your third entry after the first two
produced losses.
Confidence in re-entry is a whole subject on its own, but in this example we've
highlighted the importance of recognising when a trade is lower probability (due
to being against the larger bias), and
managing it aggressively. Both your long entries offered sufficient potential to
exit a portion with a small scalp profit, with the remainder scratched on
premise failure for close to breakeven. At worst case, these two trades should
not have produced much of a loss at all. Certainly, they should not have hit
their stop with a full position.
Through
active management, risk can be contained, reducing the fear of subsequent
entries. Of course, experience is a vital factor here as well.
2. Why
did the market rally? It's nothing to do with technical patterns. There was an
external event which changed the supply/demand dynamics of the market. In this
case, it was the open of trading in London at 08:00 GMT. The open of a new
session provides a whole new source of orderflow, and can often change the
nature of the price action.
So, to
summarise (and relate it to the important concepts of trade review and
deliberate practice)...
I would
suggest that your entries were excellent, if your assessment was for a change to
a bullish bias and rally. Recognising the trend you're fighting though, your
trades should have been managed more aggressively.
However,
the fact that price continued to push lower, stopping out both trades, shows you
failed to correctly assess the wider bearish sentiment within the market.
The bias
for this market was not for higher prices.
Higher
probability options were through waiting for a pullback to fail, allowing
re-entry short.
This is
the benefit of post-trade (or session) reviews. Learning is a result of
assessing the gap between what you expected to occur and what did occur. Review
your charts post-trade from this perspective.
And if
possible, re-trade the sequence in a simulator, using a market replay feature.
Where were the signs that bearish strength was stronger than expected? How could
you have seen this in the live market, and how should you have reacted?
Improvement comes through reinforcing the lessons found in our post-trade and
post-session reviews.
Cheers,
Lance
Beggs.
PS. A final bit for
YTC PAT
readers (I'll keep it short... I promise)
You'll
note that Stan's expectation for a reversal comes as a result of the sixth
principle. Strength was shown on approach to the S/R barrier, and it did result
in the breakout. Weakness was then evident post-breakout, leading to an
expectation for breakout failure and reversal back through the area of S/R.
However, it's important to note that this does not automatically mean we get
a complete reversal of trend and a bullish rally. The expectation was met...
price did rally (albeit only a short distance). Subsequent expectations depend
on the following signs of strength and weakness. You may recall this discussed
in the "future trend - simplified" video, where we discuss the fact that the
trend is trusted until evidence of it breaking, or evidence of strength against
the trend. In this case, you'll note the lack of strength shown in the rally
after both of his entries. This then leads to a further expectation of failure
of the rally (potential breakout pullbacks). The market was in a bit of a
stalemate at this point. Bullish orderflow from below; bearish orderflow from
above. It wasn't till the introduction of new orderflow at the start of the UK
session, that clear direction was provided.
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