Deep look into the setups..

Let’s do some question and answer session before going into the actual topic. As it is a static medium, I will play the role of the host and the interviewer for some time. I really want you to understand this.

Why people don’t leave trading despite of their losses ?

There might be so many reasons. They might always find some hope to recoup their losses. But the answer I am interested here is, trading is exciting. It is exciting for the people who gamble or novice traders, as they get pleasure from occasional profits (which comes out of luck). It is exciting for the professionals because they enjoy the uncertain market environment by respecting the odds and risk.

Why trading is exciting?

You might have got the answer from the above explanation. To bring this discussion forward, I am only concerned with the professional’s excitement. They know that the future cannot be accurately predicted. Everything works on odds and risk. His job, as a trader is to think about a trade when the odds are in his favour and the initial risk to take the trade is contained. He uses different methodologies to calculate those odds(we use price action for that), which is a different story. He knows that every moment in the market is unique.

The last sentence in bold is the one I am interested in this article. We all know that already, but we never truly understand that one sentence. If we have understood that, we won’t be trying to form rigid rules to take action in the markets. In the methodology we use, YTC, we have formed some rigid rules and to identify the structure, bias, setup and stuff to understand the language of markets. But there is something that cannot be kept into rules, like required price interaction with the setup level, signs of exhaustion, etc.. They are unique for every trade you take. You might find some similarities from the trades you take, but no two entries exactly resemble the same type of price interaction and exhaustion.

So, how to handle that uniqueness?

The only thing that we can do to handle that is to understand what we are doing before doing something. The more you understand, the more effective your performance is.

We use five different setups PB, CPB, BPB, BOF, TST. Each setup is different in terms of price interaction with the setup level. I am trying to form different scenarios of price interaction for different levels, and I will share it once it is done. Those interactions will answer the ‘HOW’ questions regarding setups.

Before that, you must get answers to ‘WHY’ questions. Let us do that here. Please try to understand each and every word as it is so important.

Why we take PB setups?

When the market moves in a trending environment, novice traders and traders who take profits from the existing with trend trades will either stall the movement or causes a counter-trend weak movement by causing some net order flow against the direction of the trend. When that order flow hits a level that can provide sufficient orders in the direction of the trend to block that counter-trend movement, those CT traders who are trading that pullback look to exit as the market is not moving in their direction beyond some level. Their exits will create some movement in the direction of the trend and that will attract some retail with trend traders to position themselves as the market is cooled down after the previous impulse move and is starting to move in the direction of the trend. This will change the polarity of the net order flow, ie. from counter-trend to with trend. We must enter before that polarity shift if we want to be positioned with lesser risk.

Why we take CPB setups?

A CPB trade-in your TTF might look like a single leg PB trade in a time frame higher than yours. So, the explanation I have given for the PB setup will be applicable for the CPB trades. In addition to that, it has an added factor, ie. the trap order flow. To understand this, let us consider that the trend is up and has formed a swing low without breaking the trend violation pivot. The upswing started from this swing low failed to extend beyond the highest high of the uptrend, and in turn gave a breakout of the intermediate swing low, recently formed, without breaking the trend violation pivot. Those novice traders who want to position themselves early in the counter-trend trade without thinking about the context of the market will consider this breakout as an early sign of trend change and initiate their shorts. When price hesitates to extend beyond after the breakout, they will look to cover their shorts and that might cause a polarity shift in the order flow if enough shorts got trapped. Then the with trend traders will come and the whole story repeats again. The end result is the trend continuing after this two-legged pullback. It can also be seen as a BOF of the intermediate SH/SL.

Why we take BOF setups?

BOF setup is my favourite of all the five, as most of the breakout failed. There is only one fundamental reason behind taking BOF setups, ie. Price unacceptance after the breakout. As simple as that. There is no rocket science behind that. But we need a lot of screen time and reviewing to understand when we can conclude that unacceptance.

But who will cause the polarity shift of the orderflow in BOF setups to bring us profits?

“Buy at support and sell at resistance.”

“Volatility contraction must result in volatility expansion.”

You might have heard these sentences a million times by now. Trading evolved, people evolved, minds evolved and some people are still using the old tactics in trading. This is how novice traders think, ” A broken resistance becomes support. So, it is sensible to buy at the resistance when it is broken out. ” So, they place to stop buy entry orders just above the resistance, to get an early entry into the move after the breakout without considering the context that the market is in. When the market is moving nowhere after their entry, they will look to exit from their breakout trades which can cause the polarity shift in net order flow if enough breakout traders got trapped. So, this is the only thing that we need to look at when our bias tells us for a possible BOF, ie, confirm unacceptance of price, then confirm trap and then pull the trigger.

There are so many possible price interactions, but keep this generalized flow charts.

Bias in favor of BOF–> Breakout–> Breakout pullback which tests the broken out level–> Failure to extend beyond High/Low made after the breakout.

I have given an example of this from yesterday’s crude oil in my FB page. Have a look at it in this link..

Why we take BPB setups?

Again, the explanation given for the PB setup applies here, except that the orders providing price level here are an S/R. We will have a trap order flow here as well. Statistics say that around 75% of the breakouts fail. Hence, so many novice traders fade the breakouts in the first attempt before it gives a BPB and they might get trapped as the broken level can provide enough order flow to cause a polarity shift. But remember, bias and context must be our utmost preference. See whether the context and bias favours a BPB or BOF, before even thinking about the entry.

Why we take TST setups?

Structural and range S/R levels are the levels where traders (including professionals) cover their positions if the premise is not in favour of the breakout of that level. That exits can cause a polarity shift if enough traders cover. We take entry just before that polarity shift.

I am personally wary about taking TST setups unless it comes in a combo like BOF of SH/SL + TST of S/R, Layered S/R, second weak test failure etc.

I hope this article enhances your perception of the markets. Stop trading with money for a few sessions and be the spectator of the market with this knowledge. Even you realize what causes excitement in professionals and it also improves your performance. You can use the market replay for this.

I repeat, fixed rules don’t work in trading. Like Lance mentioned in one of his articles, you are your edge and you must do everything you can to improve that edge to survive in this cruel market arena.