post-entry-part-3

Post Entry… Part 3…

First of all, I am so happy to receive positive feedback about the series of articles I have been posting for the past few months. I have been receiving a lot of emails from the readers, attaching the trades they have taken in which they applied the concepts they have learned here. Nothing makes me happier about this blog than traders converting conceptual knowledge from these articles into real profits. Kudos to you guys and keep going. If you have sent a mail and didn’t get the reply from me yet, I’m sorry and I will respond soon as I got stuck with some other errands.

This is the third article of the post-entry analysis (probably the last one) and I hope you are well aware of everything I explained till now. You can always find the series of articles if you wanna go back and learn in an organized index in “The Series” section under the trade school menu icon. Without wasting any time, let’s jump into the third section and the most important one in the exit strategy, ie. “Trade management and trailing stop”.

3.Trade Management And The Trailing Stop :-

“The only area I need to focus on my trading is Trade management. Everything else is fine with my edge.”

“If I did hold this trade for a few more minutes, it would have covered all the losses I have made this month.”

“Market makers are kicking me out of the trades and then the market is reaching my target level.”

Have you heard frustrated traders complaining like this? Or at least, have you ever complained yourself like this when you are frustrated with the underperformance of a good trade?

My answer is yes to both the above questions. Even now, when I exit a trade early, my immediate impulse reaction is, “Damn!! I should have held this trade without exiting with a limit order.” That is the stupidest thing one can say to himself or to complain to others. The market is equally fair to each and every trader and every result that you got (or will get) is the result of the skill you got at the time of taking that trade. Even though you are a damn good trader, as you make real profits only after exiting the trade, the result is totally consistent with the mindset you approached the market while managing that particular trade.

Do you feel that trade management as a missing piece of your trade plan?

Stop complaining and accept the fact that your skill to read PA and take signs from the market to make an informed decision at the hard right edge is incomplete. Start working on the basic building blocks of the markets.

Are you exiting the trades early every time and taking bad decisions thereafter just to give back everything you made to the markets?

Stop complaining and accept the fact that your skill to read PA and take signs from the market to make an informed decision at the hard right edge is incomplete. Start working on the basic building blocks of the markets.

Do you feel that market makers are often kicking you out of good trades?

Stop complaining and accept the fact that your skill to read PA and take signs from the market to make an informed decision at the hard right edge is incomplete. Start working on the basic building blocks of the markets. Best way to look at the markets is by conducting a top-down analysis.

TOP – DOWN ANALYSIS :-

To manage the trades well, you must have the right skill to understand the context of the markets. So what exactly I meant when I use the word context here? Not a pre-defined checklist. But let me name some important things to look at while trying to find the context in a given situation.

Trend structure.. (Ranging/Trending)
If ranging,
Where to draw the boundaries, acceptance/rejection of the market at the boundaries and does the move started at one edge has the potential to test/break the other edge?
If trending,
Strength of the impulsive moves, the strength of the pullbacks, location of the current price with respect to the HTF S/R boundaries (chances of trend reversal), acceptance of price at new highs(or lows) in an uptrend (or downtrend), how far it is extending at new highs(or lows) in an uptrend (or downtrend), is the trend weakening or maintaining the same strength while approaching the HTF S/R, does the current swing impulsive enough to break the HTF S/R, where is the trend violation pivot etc.
Has the current candle broken the high/low of the previous candle(s)? If broken, did it close beyond that high/low? How does this candle affect the behaviour of the current swing?
To put it all together in one point, it’s just a “top-down” approach. Start from the location of the current price action with respect to the HTF S/R, then the trend structure, then the swings, and then the candlesticks. Things won’t be clear if you do the reverse, ie. starting from candlesticks and travelling towards the trend analysis (which most of the traders do).

Can a single strong candle reverse a strong trend?

Of course it can. But the odds are not in favor of that to happen.

Can a single strong swing against the trend change the whole trend structure?

It can. But the odds of that happening are very low. So it’s always better to wait for the trend change to take a trade against the current trend unless the market is not trading at the HTF S/R even when it is showing the signs of weakness.

These type of questions can go on and on. My point is to make you understand this one thing.

If you want to know the correct context of the market, then you have to ask the right questions to the market. If you want to ask the right questions, you must have a good understanding of the basic building blocks of your trade plan.
Once you understand the context, then question the current swing to know whether is setting up in a way that can affect the behaviour of the current trend structure or not. Once you understand that, then question the candle that’s printed on the hard right edge to know whether it can affect the behaviour of the current swing or not. That’s the top-down approach for you.

Don’t worry about the trades and profits. Just learn to analyze the markets properly reading the PA in the chart in front of you. With time, you will make informed decisions and that’s what improves the results at the end.

Trailing stop loss:-

I don’t know why, whenever I hear the word trailing stop loss (TSL), the word “regret” rings in my ears. Weird, but true.

Some traders (those who are in fear) end up in kicking out of the trades early due to trailing stop loss just to see market reaching their target after they are flat. That’s fear of losing paper profits.

Some traders (those who are greedy) end up exiting the trades late even when the market is not willing to reach the targets they have set. The same group of traders often hesitate to take profits with limit orders at the target levels. That’s greed.

Clearly, both of the two categories of traders I have mentioned above are not operating with the realities of the market action. Their fear and greed are blinding them from perceiving what’s happening. Trust me, I have my share with the regrets from fear and greed in my trading career. Like a lot.

I mentioned once in one of my past articles that, stop must be trailed to a level to which if market reaches will violate the premise. That’s too vague as that violation of the premise is subjective. Some see breaking a level as a violation of the premise. Some see close beyond a level as a violation of the premise. Some see close and then acceptance of the price beyond the level as a violation of the premise. Everything is fine when you are including market structure into your trailing stop determinations. But the problem comes when people trail their stops to random areas without a proper level that is tested and proved above that price to protect the stop, just because of the fear of losing the paper profits even when the market is not showing any signs against their trade. That’s indirectly dictating to the markets that it should not come back without any structural evidence. These are the people who get their asses kicked by the market even when they are in a damn good trade, and are forced to make bad trading decisions because of the screwed up psyche with regrets. This directs me towards my first guideline in the trade management and trailing stop section.

If the trade that you have taken fulfilled everything you need to take the trade according to the trade plan, you have clearly accepted the initial risk and if the targets are in the right place, there is no point in being aggressive while trailing the stop.
Keep the fear of losing (while taking a trade or while managing a trade) at check. The moment it enters your mind, you can’t perceive properly. Lack of good psyche is as bad as a lack of money to trade.
Decide whether the trade management has to be aggressive or conservative at the time of taking the trade itself (of course depending on the context). Once the entry order gets the fill, your mind starts playing games (especially when you are trying to avoid risk which you can’t do to survive and make profits consistently in trading) which in turn affects the perception to read the PA. So plan the trade and trade the plan.
Check and double-check the targets to see whether they are in the correct place and in sync with the context of the market. Don’t be too greedy while taking the profits. Always be conservative.
Time travel into the future to visualize the price action that violates the trade premise so that you will be prepared to scratch the trade without a second thought when you see them.
It’s fine to hold through small corrective pullbacks against the trade provided the stop is in a right structural location before hitting the targets, but drag the targets closer when the pullback turns out to be impulsive.
Look at the first trade in the following chart. My target was near the green line, but the pullback was impulsive and hence I immediately dragged the targets to the swing low which gave me a perfect exit.
postentry_3
These are the general trade management guidelines. You can add your own to the above list. But keep in mind, the simple, the better. And simplicity doesn’t mean ignoring the important stuff.

Now the next question is do we need a trailing stop all the time?

This is the question I have asked myself when I was kicked out of the market early a lot from good trades while trading hourly charts of Nifty a few months back. In fact, the concept of trailing stop seemed stupid to me while actively managing the trade looking at every single candle. Even now in the trades, I am posting in my FB page, you might have noticed that the stop is staying nowhere closer to the current market price even when it is nearing the target. That’s what I am doing in my trading.

Once the market defines a structural level in TTF to trail the stop above the breakeven point, I am trailing my stop there to take the risk of the trade to zero. That clears up my mind from the thoughts of losing money from my account. Then my focus solely stays on finding a better exit reading the candles on its way towards the targets. But I do have a framework for stop trailing, for both conservative and aggressive approaches.

Conservative Stop Trailing :-

For Long trades,

Trail the stop below swing lows in TTF when the swing high is broken and price got accepted above that swing high.

For Short trades,

Trail the stop above the swing highs in TTF when the swing low is broken and price got accepted below that swing low.

Aggressive Stop Trailing :-

For Long trades,

Trail the stop below candle lows in TTF when the candle high is strongly broken.

For Short trades,

Trail the stop above candle highs in TTF when the candle low is strongly broken.

Now you might ask when we have to be conservative and when to be aggressive.. I have to disappoint you for that question as it doesn’t have a single defined answer and totally depends on the context.

For the explanation purpose, let us say I have taken a BOF trade of the range boundary on a second attempt failure after a strong BPB. I have to manage that aggressively until the market enters into the region before a breakout. As the BOF of one range boundary is expected to break the other until proven otherwise, I have to be conservative thereon till it reaches the other boundary.

When I have no intention of holding through pullbacks, my trade management has to be aggressive. In rest of the cases, it has to be conservative as I value my edge.

Note:-

This is totally related to my personal trading and are not fixed rules of trading.

Like I mentioned earlier in this article, first focus on picking the right trades keeping the TTF context in mind even when that means taking only one trade per day.

Then understand the word accepting initial risk. Most people think that they know what risk acceptance is, but they fail to show that in their actions. Like managing every trade aggressively, bringing the stop to BE without any structural reason and all. I emphasize again, don’t try to avoid risk. You can’t do that in uncertain environments like markets. In stead focus on taking good risks.

Make sure the targets are in the right place and then manage the risk depending on the candles if you are trading the swings when you don’t have any intention of holding through pullbacks, or swings if you are trading the move from one level to the other with an intention of holding through corrective pullbacks.

And finally, remember to plan all these things at the time of taking the trade itself. Don’t just react every time. Anticipate and then take informed decision looking at the market action.

Keep It Simple and Stupid..

Even after doing everything correct from my side, I don’t expect everything perfect from the market.

I have trades like these where my entry is almost near the bottom and the exit is almost near the top.

My exit was just one tick above the bottom in the above trade.

I also have trades where the market moved significantly after my exit like the one in the following chart.

I also have sessions where nothing works according to my plan and I end up not taking a single profitable trade in the whole session like this.

Honestly, that’s the fun in trading. It will be boring if you win all the time or if you lose all the time. Build the skill to trade properly, and enjoy the beauty of uncertainty while managing the trades.