Know the opposition..
I hope you all are doing well in the markets. This article is going to be interesting. Let me confess first of all. I really have no idea how long this article is going to be. I had a very very productive conversation about trading with one of my friends, and it turned out to be so much informative. So I just thought of writing an article about that.
I was asked a lot of times by my fellow traders, how I am maintaining my win% to such a good number, how I am identifying that the trade is not working and scratching it before getting into a full stop out, how can I sit patiently, blah.. blah.. blah…. There is only one answer to all these questions. I never sit idol in front of the charts. I watch every tick movement in my TTF and LTF and I try to maintain the feel for the market every moment whether I am in a trade or not.
You might already know by now the blue print of my trading plan. I will give a brief explanation of it as a quick presentation.
First I structure the market using HTF and TTF.
Then I find future bias.
Then the type of setup(s) to look for.
Then the price level to initiate trade.
Then I’ll wait until price approaches that level and then look for exhaustion or failure to continue beyond the level, to time the entry.
I follow the procedure in the same order. If I got stuck at a step, I will start again from step 1 and I don’t jump to the next step.
Simple, isn’t it??
If trading is that simple, the success ratio in this business would have been high. Let me try to explain why it is not that simple.
The first three steps, namely, structure, bias and the type of setup needs a hell lot of hard work to master. They demand a lot of understanding about the market dynamics and understanding about the strategy you are using to the dot, especially when you use price action for trading. Technically, you need a lot of screen time, reviews and exposure to different market environments which obviously needs a lot of clock time (say years). On top of that, if you approach the market with an idea get rich quick, that learning curve will extend more. You need to find which structural boundaries work and which doesn’t, which trend definition work and which doesn’t, how to find the proper future bias in different scenarios in different market environments etc. There is no way you can learn it without hard work and experience. So, the first thing you need to look for is to survive until you get enough experience to at least master these. There is no skill related stuff in these three steps. I repeat it’s all about the experience, reviews and the screen time. No other short cut. So, plan for the survival (at least 2 years) before actually thinking about making money in markets.
Identifying the price level also needs a lot of reviews and exposure as it depends on the context and the environment that the market is in. Let us say you are expecting a pullback setup. To take that trade, you need to identify the price level where you expect that the pullback most likely ends before price actually reaches there. There will be a lot of such levels that can provide the order-flow to end the pullback. To choose the best level between them, you have to consider the strength with which the trend is moving and the impact that the level you are examining has caused in the recent past. So, you must study a lot of samples of the pullback trades in different trending environments to know where they ended, test them in live and then make them a part of the trade plan. For me, there is no trade if I failed to identify a proper price level to initiate the trade. This increased my win% to a significant proportion. It needs a little bit of skill while reviewing and also while identifying the levels in live as you have to consider the context to choose the proper level.
Then the next step is identifying the exhaustion, which is the main topic of this article. Trust me, it is not at all easy and I suggest you stick to the stop entries 2 ticks away from LWP when the price is trading at the level you are interested in until you train your mind to identify exhaustion properly. You might notice that I use the word feel for the market a lot of times. Even that comes under this category.
So, the question is how to train yourself to maintain the feel or to identify the exhaustion?
To maintain the feel for the market, you must be able to identify the bias properly. I repeat bias is the heart of my trade plan. If your bias is properly identified, you can make money even when you are not good at the rest of the things. But if you don’t know how to identify the proper bias, no matter how much you try and how much you practice the remaining things, your dream of consistent probability will be postponed to your next life. It’s the first step.
Then you need to know who is on the opposite side of your trade. I mean to say, if you are looking for a BOF setup, breakout traders and breakout pullback traders are on the opposite side of your bias. If you are looking for a PB/CPB setup, counter-trend traders are on the opposite side. For TST, with trend traders. For BPB, counter-trend traders.
To enter in trade, first, you need to make sure that those who are in the opposite side of your trade got into a position and are feeling emotions when the price is not moving in their favour, beyond the level you have chosen.
I would like to talk a bit more about this. Let’s divide the traders into three categories..
Gamblers, who don’t know what they are doing, not even a single word in technical analysis, but are trading for random money and for an adrenaline rush.
Beginner traders, who know few basics about technical analysis like candlestick patterns, chart patterns, indicators, some price action related stuff etc, but with very limited exposure to the markets (less than 3 years). They think that they can beat the market with the knowledge they gathered about the markets. Honestly, these are the guys who gonna suffer serious drawdowns as they trade with their arrogance, hope and belief without respecting the risk and the context that the market is in. They always pat their backs by looking at the hindsight charts and the way the market respected their analysis after the fact. As a matter of fact, these are the guys who pay our wages. 😀
Professionals, who are skilful, disciplined, hard workers and have a decent exposure to different states of the markets. They know what they are doing and they always respect the risk.
In the above three, we must always trade with the professionals. Never ever trade against them. So, the first question I ask myself before placing an entry order is, am I fading professionals?
I have posted the following chart in my FB page yesterday. The reason why I didn’t take that trade is, the BOF setup formed is a professional entry and I will end up fading them if an entry is taken. As expected, it would have been a losing trade if taken.
Between the gamblers and the beginners, most of the money professionals get are given by the beginners as they are arrogant and are controlled by the hope and the belief on the acquired knowledge. Gamblers, on the other hand, don’t know anything about the markets. When they lose, they accept that they had lost as they don’t know anything about markets. But beginners think that they know everything about markets and hence take positions aggressively even after proving that they are wrong by the market, just to donate their money to the professionals.
To narrow down my ongoing analysis, I just assume that there are no gamblers against me and I am fading only beginners. With this assumption, I can name those traders who are taking positions in the wrong context as beginners. With a little knowledge of classical chart and candlestick patterns, I will know whether they have taken a position or not before my entry and against my bias. Then I assume myself as one of those beginners who took the position against the trade that I am actually planning to take. Then I will try to feel the emotions that they are going through when the price is interacting with the level that I have chosen and then time my entry when the emotions completely take over.
No candlestick patterns, no high/low breakouts, no indicator based entry triggers. This is what I do to time the entry and this is what I mean when I use the word feel for the market. I don’t have a problem to miss an entry while doing this process. I prefer to sit aside rather than hurrying into a trade without knowing what exactly is happening in the markets.
Your battle is half won when you identify who you are fading and how their emotions are at the given moment. This is fantastic information to have to make your trading better.
I am a big fan of Sun Tzu’s book, The art of war. This quote will give the entire concept of this article.
“If you know about your enemy and know yourself, you don’t need to bother about victory.
If you don’t know about your enemy, but you know yourself, for every victory, you will face a defeat. So you win 50% of your battles.
If you neither know about your enemy nor yourself, you are doomed to failure. “
I will try to post a few charts explaining this in my FB page and Twitter or in the other blog when I have time. Try to implement this in your trading and see how it changes the way you look a the markets.
can you please elaborate a bit about how and why the above set up was a professional set up?
After the breakout, price got rejected twice. In general, when the market tries to do something twice and fails at a decent level, it will do the opposite. Here, in this case, it failed to continue after BPB of the level. So taking a long there have lower odds.
Any more pointers about how to know if the move is professional?
And in above comment, you said “After the breakout, price got rejected twice”
Now I am looking at TTF chart. Soon after the BO, there was a red pin bar. I take that as the first rejection. Then the price went up and again fell to the level with a red WRB. is that the second rejection?
I meant selling from the new highs after the breakout when I said it got rejected twice. A move can’t be a professional. I might have wrongly used in the context of a professional trade.
Yeah.. what you said about rejections are perfect.