Post Entry.. Part 2…
In the last article, I have introduced the approaching mindset for two different environments of the market (trending and range bound), and I have also given a few realistic expectations towards the market. They seem simple, but they do play a crucial role in determining your trading outcome in the long run.
I’m assuming that you are now good at determining the type of the environment, then the high probable future direction and then identifying a low-risk entry. You can find everything here.
You must realize that everything you have done till now is on the data that is already printed on the chart, i.e the past data.I’m not saying that it’s easy, but it can be learned with some effort. Once the entry is made, you have to deal with the future till the death of the trade and that is the exact reason why people fail to make in this business even after reading a big rack of books.
Have you ever heard amateur traders complaining like,
“My trade plan is good at picking right trades, but I’m failing to exit at the right time.”
“At the end of the day, if I exit a trade with the limit order, it turns out to be an early exit. If I leave paper profits on the table, it turns out to be a late exit.”
“I would have made a lot if I hold this trade for 10 more minutes”
90% of the traders feel this way. Maybe more. But the point is, don’t call it a trading strategy/plan if it doesn’t have an exit strategy. That need not be a rule-based one, but it must at least have a framework to make informed decisions after the entry. If you are complaining like above, understand that your edge is incomplete and you have to work on it. No excuses.
Another reason why people complain like above is, they keep on focusing on the outcomes of every single trade rather than looking at stats over a series of trades. That doesn’t mean they don’t know that it’s a game of probabilities. They might know that, but their actions don’t reflect on what they know like it is explained in the book, Disciplined Trader, by Mark Douglas.
So the point I wanna emphasize is this,
If you are consistently missing the opportunities (early/late exits or missing the trade-in whole) in the live market, and are seeing things only in the hindsight charts, it means that your current edge doesn’t have the potential to recognize those opportunities. I repeat again, an exit strategy is a part of the trade plan and the trade plan is incomplete without that.
So, don’t fool yourself saying that you will catch this next time without changing something in the trade plan. You will do the same mistake again and again, and this next time thing keeps on postponing unless you introduce something into the plan.
Now that you understand this one point, you are better than a lot of other traders who are stubborn to accept that their edge is missing something. Congrats. 🙂
Before going into the details of the exit strategy, I wanna tell you that whatever I write in that section is mostly dependent on my own trade plan and I will try to generalize it as much as I can so that it can be used for traders following different trading approaches than mine.
THE EXIT STRATEGY:-
To make it a bit clear, I will divide this section into three subsections, namely,
Initial Stop and Target,
Expectations on PA immediately after the entry,
Trade management and trailing stop.
Another great post. I’ve gone through everything you have described and I know a key to my success is trade management and also how well I exit. These two things are definitely part of my trading plan now because too many trading courses only talk about entries and how many pips you can make. They do not address the importance of trade management and exits, lessons I had to learn the hard way.
Just curious, so you are a follower of Lance Beggs, do you use any other tools to help with exits? I guess you no longer look at the print.
Totally agreed with what you have said. There is so much hype to the setups and entries in the trading community blinding novices from the fact that paper profits are not the money in the bank account. We all learn about the facts the hard way in this business. 🙂 I also belong to the same category.
My trade plan is built around the principles of Lance Beggs, but the way I trade is totally different than his. I don’t use anything except candlestick charts in my trading. All the decisions are based on the charts only.
1) Initial Stop and The Target:-
If your entry is with a stop order placed at LWP, (ie. high/low of the signal candle in TTF), the location of the stop is quite simple. The initial stop goes to the other extreme of the signal candle/ or the low of the swing you are fading. I strongly recommend this type of entry to the traders who haven’t reached the breakeven status yet.
The problem comes when the entry is with a limit order. You will not have a properly tested location to hide your initial stop till market crosses the LWP, and that forces you to use a volatility-based stop until market triggers the LWP to protect yourself from kicking out of the trade due to whipsaws. Then you have to be ready to scratch, reassess and reenter(if needed) if the market takes too much time to trigger the LWP, to avoid a full stop hit. This brings me back to a very important point that I have mentioned in the last article. You don’t know that the entry you have picked is the top/bottom until the market says so, and if you pick one, take that as an accidental event rather than trying to make it the core of the strategy. If you think that the entries that are picked to the tick at the top/bottom come at one or two tick initial risk, that’s wrong. The stop only goes above it once price crosses LWP. Until then, it carries the same risk as that of the other limit entries which gave an entry few ticks below the top or few ticks above the bottom. I would like to talk much about this, but it makes this article very lengthy. So I’m postponing it to the future articles.
I know you will be bored with me repeating the same thing again and again. But I have to say this as it is very important. Limit orders and tight entries attract every single trader with a novice mindset and make them lose in the game blinding them from the realities. To cheer them up and keep them going, the market gives them one or two sexy entries right at the top once in a while. So don’t try to decrease the risk if you haven’t reached the position of taking and accepting calculated risks and bringing positive outcomes over a series of trades from the risks you have taken. You can’t survive in this game if you are trying to avoid risk.
I’m not going to talk about all in all out, all in scale-out, scale in scale-out mambo jumbo. Once you start approaching the market with a proper edge and with realistic expectations, you will slowly adapt whatever suits to the environment at that moment.
Focus on the words edge, expectations and the environment in the above point. That’s right. Targets depend on the context and the environment that the market is in. To keep things in one place, let me rephrase two points from the last article here.
In a trending market, I trade the impulsive swings of the short term trend which starts at the end of the corrective pullbacks and complex pullbacks, targeting the immediate minor supply/demand level or HTF S/R level. ie. I don’t want to hold positions during deep pullbacks in a trending market.
In a ranging market, I predominantly look for BOFs of the range boundaries targeting the other boundary with conservative trade management (ie. with a loose trailing stop), and BPBs when the breakout is strong and price got accepted after the breakout beyond the boundary. I manage TST setups aggressively (with aggressive stop trailing) targeting the immediate swing highs and lows to the left of the trade entry.
Nothing to talk about trending markets as the explanation about the approach is crystal clear. Enter at the end of the pullback and exit at the end of the impulsive move without holding positions into deep pullbacks. I personally find scaling out best suited for trends rather than all in all out.
Now the question is, why can’t we do the same in a ranging market? Why do we need to complicate things adding one more approach to the targets and the trade management?
Nothing wrong. You can certainly trade the swings in intra range trend. But, the movement from one boundary to other boundaries in a ranging market need not be in a properly defined trend fashion(trust me, it’s true most of the time in ranges). Understand this point which I have mentioned in my last article.
” Ranging markets are there to rip of trend-following approaches. Trends are there to rip off those traders who always like to fade the breaks outs and weak swings at new highs in uptrends or new lows in downtrends (very common habit)“.
Most of the time, the PA within a range looks weird and trying to understand that messes up the psyche. Care must be taken to preserve the psychological capital.
When the market is in a clear range, dump everything about trending approaches and introduce something that gives effective results over the long run.
It doesn’t mean that I don’t trade intra range trends. At the start of the article itself, I mentioned that it is just a framework to make informed decisions. You can bend it if you need to, but don’t break them. Look at the following intra range trade for example.
So the conclusion of this target section is this,
In trends, target the immediate supply/demand level, and manage the risk thereafter.
In ranges, trade the moves from one boundary to the other for BOFs. For TST setups, scale-out if immediate strength is not displayed. Trade the intra range trend only when it is crystal clear and the range is wide enough.
Always be conservative with the targets. Don’t be greedy. Decide the probable location to take profits off the table at the time of entry itself. If you don’t know when to exit, you are as good as a loser in trading.
2) Expectations on PA immediately after the entry:-
This is a very important aspect of post-entry analysis. The good thing about being a discretionary trader is, once you got enough skill, you can sense when the setup is losing its edge and you can plan an exit immediately. You need not wait till the stop got hit.
I know this is so much to ask for, but just by developing the habit of anticipating how the immediate PA have to unfold to keep your edge intact will allow you to make proper decisions without taking a full loss. Yes. I am talking about scratching trades.
I remember mentioning in an article of mine that I look to exit if the swing that I am trading turns out to be corrective. When I mentioned swing that I’m trading, please make a note that I am talking about trends.
So the immediate question I have to ask is, what makes a swing corrective?
This is a subjective decision. But after going through a lot of reviews on the trades which failed to reach my targets, one point stood out.
If the trigger candle of the swing closes between LWP and the initial stop-loss, it ends up as a corrective move most of the time.
Is that it?? If the trigger candle closes beyond LWP, that trade is good to go?
Yes and no. A few weeks back, I came across a very old YouTube video of Lance, where he talked about the addition of candlesticks and that brought another change into my post entry analysis. Of course, I tested it before making a part of my trade plan. Here it is,
If any candle closes between LWP and the stop after triggering LWP, it makes it a corrective swing. It can be the trigger candle or any candle after the entry.
This scratching section is always to the trending markets. I like to hold BOF trades in ranging markets as the opportunities will be very limited in range-bound days and I don’t wanna miss them with the fear of taking a 1R loss.
Again, these are not fixed rules and not something I do every single time. Sometimes, I don’t scratch the trade immediately even after sensing these signs(look at the following example). It’s just a checklist that makes the move as a corrective swing. In reality, the corrective move can reach the target without hitting the stop sometimes and I might miss those opportunities. But my goal is to trade the impulsive swings in trends and looking to exit when the move turned out to be corrective always makes sense.
Scratching trades needs some skill to read and anticipate the PA immediately after the entry and is not as easy as I have mentioned in the above points. So don’t focus too much on this in the initial stages of your learning curve.
The topic of the post-entry still continues and I would like to end this article here itself as it’s already lengthy.