how-i-play-with-limit-orders

How I play with limit orders ??

Hello traders,

I hope you are having great trading sessions. My trading improved a lot for the past couple of months as I started focusing more on limit entries. In a series of 20 trades, almost 85-90 percent of my entries are with limit orders and I rarely see my stop getting hit as I am always ready to scratch the trade after entry either by tightening the stop or by bracketing the market price with the stop and target orders depending on my feel for the market if the market is not behaving as per my If..Then cases … I haven’t totally perfected it yet, but I am now comfortable in applying the tactics I built around limit orders and the results are pretty decent. So, I thought of writing how I play with them in a single article so that you can also work on it. I will keep on updating this article in future if I make changes to my limit order entry techniques.

The followers of the classical technical analysis might have a misconception about the top and bottom picking as most of the textbooks say that it’s impossible and we gonna burn the capital if we try to do that. Let them be like that and let’s work on something which they said impossible so that we can have an edge which almost 95% of traders don’t have. If it is impossible to pick tops and bottoms, who are accumulating positions at the extreme tops and bottoms?? Of course the professional traders. Now, the question is, what are they seeing which we cannot see in price action?? After all, it is the same price chart for all traders. Is there a way to trade like those professionals? I don’t know.. But if they can do with the same resources, we can also do that. It might not be easy, but it is possible.

Note:-

You must be well versed with applying everything I mentioned in the beginner section before trying this. It’s not for novice traders, you must have some market experience to try this in real-time. This is the technique that I am using right now to enter into trades in my trading.

Remember, I don’t place a blind limit order and wait. I want price to enter into the setup region and then I place the limit order looking at how it is behaving there. My limit entry order remains open for not more than 30 seconds.

Pros of using limit entries:-

Reduced initial risk, which is the only thing that traders need to focus on.
We will get sufficient room to scratch the trade for a small profit or at least break even results. Stop getting hit is very rare if you perfect this.
No chance for slippage while entering.
The better risk to reward for the trade.
You will get a lot of retail entry levels to scale out your positions. This one looked like a boon for me as I love scaling out.
Cons of using limit entries:-

No predefined level to place the initial stop. You must use the market data on the left or a volatility factor (ATR) to place the initial stop loss.
In spite of the very less initial risk, there is a chance of price moving against your trade as the LWP is not yet triggered at the time of entering. Managing the trade aggressively until LWP breaks will solve this problem. It demands a lot of focus.
There is a chance of over-trading if you don’t know what you are doing. So prepare a checklist using this article to avoid chaotic decisions at the starting stages of practising it.
Increase in commissions as there is a chance of early entry and scratching especially during the initial stages.

Pre-conditions on Psychological level :-

Focus. You will get not more than 20 seconds to place the limit entry order as we react only after the price got entered into the setup region. Managing the trade aggressively until LWP breaks also demands focus.
You must know when you are not in sync with the market to avoid overtrading and revenge trading. I personally avoid the setup area if two consecutive trades are scratched before T1 got hit. I will step aside from trading to clear my mind if two consecutive full stop losses got hit.
You must completely accept the initial business risk. You cannot maintain proper focus if you feel sad while the stop hits or the trade moves towards the stops after your entry.
Last but not least, stick to your money management rules. You need to pay a lot to the market to develop the skill of using limit orders and it is your responsibility to keep that at minimum.
Pre-conditions on Trading methodology level:-

You must be comfortable in applying the concepts from the beginner section of this website.
Try to bracket the entry price using the stop and limit orders to avoid missed opportunities if the BO entry provides proper risk to reward ratio.
Once you are clear with all the above points, it’s time to jump into the procedure of working with limit entries.

THE PROCEDURE:-

You must have the following in place before you place your fingers on the number key board to enter the order parameters.

Clear future bias.
High probable setup area/ price level to act on.
Evidence of weakness in price action while the market approaches the setup region.
1) Momentum analysis.
2) Projection and depth analysis.
Feel free to add your own methods of identifying strength and weakness.
Evidence of overextension, rejection (tail) or stall of price from the price level we are interested in.
Your feel for the market tells you which timeframe to use, ie. LTF or TTF as each and every interaction of price with a level is unique. I personally like to see rejection from the price level to place the limit order.
Once you have all the above four, It’s time to play with the limit order around the region of the rejection (tail) or stall. Place the orders when price hesitates to move beyond rejection or stall in the next test of the rejection/stall area. Buy when there are no sellers and sell when there are no buyers.

Remember, you get very less time to enter or modify the orders. You must be very quick. I am using Market depth window to ensure that I get a fill after I have all the above points at the back of my mind. I wish I have traded from chart option for amibroker to the nest software, which would have made my life a lot easier. You don’t need to use that at the earlier stages of learning it. Focus completely on the charts.

Greg ,one of my buddy traders correctly stated in his FB page about the entries. It goes as follows:

“Best limit entry is spot on…and sometimes right away in profit upon entry…no matter of the size of the candles. Best stop entry is at least 2 ticks behind the initial price movement and usually more…There is the place for both in your arsenal, but limit just seems a little better…
The best part about limit entries…is that the retest usually doesn’t go that far.., which has been my biggest issue as far as TM is concerned…i’ve been too often stopped out on retest…I was fighting this, but my trading psychology doesn’t like to allow retests…so good limit order kind of takes care of that..”

I will try to add some examples this weekend from Nifty 3 min charts as a continuation of this article. Look at my trades today here to see how I use limit entries in my trading. Feel free to share your doubts/views on this article in the comment section (positive or negative) so that it helps others including me.

Hope it helps.. 🙂

Happy limit order entering..

User says:
1) Your first trade today – Momentum was pretty good as price entered the setup area. The only symptom of weakness seems to increase in depth. Would you have taken the Limit order entry here, if the depth was less? Did you find anything other than depth that suggested weakness of bulls?

You have observed where exactly the second testing is halted, I believe. If the second testing breached the swing high of the first attempt, would you have placed the Limit order? You normally observe the second testing to confirm that it is not breaching the extreme of the first attempt?

2) Your second trade – Was that zone a high probable set up area? If so, why?

In this trade, as strong pin bar rejection was seen, we may not be seeing clear second testing. So when exactly you placed the order? Did you wait for another candle to see whether price pauses at this level?

3) I think you first keep the SL order before keeping the Limit order. How much do you keep as initial Stop loss?

4) Your 3rd and 4th trades – You have jumped in after seeing a small doji like a candle in 1 minute, though the previous candle was a very strong WT candle. It is a bit difficult for me to act decisively in this situation. Can we trust this set up at a Range boundary for reversal trade – strong WT candle followed by a small doji candle?

Once again thanking you.

Reply:
1) Look at the LTF chart. True that momentum was good. But I felt like the pullback swing was overextended and the price was not willing to move up. So took a chance and finally ended up as a scratched trade. There was no depth evident in that swing. What depth you are referring to??
2) Yes. That was a high probable zone. In a CPB, the intermediate pivot high/low is an important level to watch. See how price behaves after breaking that intermediate level and take action if required. In fact, any level that is obvious for all the traders is worth watching. It was not about the pin bar or some other candlestick pattern. Free your mind from the patterns and think in terms of the market dynamics. My focus was on LTF chart at that time. Price immediately got rejected after breaking that intermediate pivot high. If that breakout is a successful one, it must continue to move up, but price hesitated to do that. In the LTF, after the pin bar, it was rejected again in the next 1 min. candle. I haven’t placed the order yet. When price reached the top of the rejection zone, it moved nowhere after breaking the high of the rejection bar and that is when I reacted. The order was open just for 3 seconds I guess, as I placed it looking at the market depth window which I am practising to use while limit order placing these days. My focus was not on candles. It was on the price behaviour at the price level I was interested in.
3) For a BO entry order, I place the stop loss only after the entry gets executed. If the entry is with the BO, the stop will be at the regions I have explained in the articles. If the entry is with limit, I normally place a stop 10 points away and drag it down the regions explained in the articles after LWP got triggered.
4) Like I mentioned in my previous comments, I am not interested in candles. I look at the future bias, strength and weakness, price level and the behaviour of price at those level with a list of my hypothesis from the structural journal at the back of my mind and then I take action. Candles are just a mere representation of market data. There is nothing magical about them.

User says:
After reading trading literature in net, I have started believing the following.

  • Intraday trading is utterly impossible i.e mathematically impossible for a discretionary trader, with exception of rocket scientists with their co-located servers.
  • Trend following with weekly candles is the only game in town.
  • Trading at the edge of candle tails, that’s impossible too (think about the horror story of people shorting dot com bubble).

I came to the above conclusions after reading some of the big names and gurus in the trading industry.
Your charts have proved all of them were only partially right ( or partially wrong if you prefer the glass half empty!).

Kudos for your great work!

Reply:
What you have said is completely true. It’s a fact that trading (especially day trading) is not an easy thing to do like most other businesses. The ability to start with a minimum capital attracts a lot of money seeking people(mostly those who want to turn rich quick) into it. As the reason why they approached is wrong, they fail in it. On top of that, the internet and most other media sources published a lot of negative things about trading like Trading is gambling, Success people in trading can be counted on fingers and stuff like that. Days changed, we now have access to every tick of data live from the exchange and people are trading 1 range charts to trade which looked like next to impossible a decade back. It is up to us to make a decision whether to follow those classical limitations or to go in a new direction by accepting the initial setbacks and losses. When we know the rules of the game, it’s our responsibility to explore and expand the boundaries and pass the knowledge to the descendants like our Gods Sachin, Federer, Messy, Tiger woods etc. are doing

User says:
I am trying to grasp your methodology of placing Limit orders using LTF. This is what I have understood. Please correct me, if anything is wrong.

After analysing the future bias, we wait for the price to enter the yellow zone. Here,

1) We look for rejection as soon as the yellow zone is breached. After the yellow zone gets broken, there should not be any follow up buying/selling, leading to a slight move in the opposite direction.
2) The second test of the extreme must not breach the extreme of the first attempt.
3) Now comes the crucial part. Now we wait for the price to pause at the same level for around 20 seconds. We have to be a bit flexible with the duration for which price pauses. Now we can take the Limit order entry.

If anything contrary to the above 3 happens, we should not take Limit order.

Would like you to correct the flaws, if any in my understanding.

User says:
Great going. But the second point might not be true. It can break that extreme of rejection but it must not show any strength around and beyond that rejection.
The whole point is, the presence of no strength in the area of rejection. It’s not about breaking the extreme or not. Sell when buyers are exhausted and buy when sellers are exhausted

User says:
Can we use this strategy for exits also? When price does not seem to be going in our direction of entry after the second attempt and pauses before reversing if we can exit the trade, that is the best possible exit, one can think of.

Reply:
It depends. I can say yes to your question if this happens at an obvious price level.But doing this at all the rejections might result in early exits. I personally don’t like to focus this much during exits.