I received an email from someone that I have chatted with through the years. He is relatively new to my free weekly setups and is trying to understand the thought process behind the entries.
Let’s go over some of the charts he sent to see if my entry and my explanation of entry, can be found by someone else. These are the setups from April 12 – April 17.
I had written the following: We were in a complex correction as thought as price stalled at our zone. The entry off the four hour is after price fails to make a higher high and actually fails at the high prior to the higher high. I do like this type of entry. Think of a double top but getting in when the right shoulder shows failure.
He wrote: Price made head and shoulders pattern – entry at break down of right shoulder.
This is exactly right. We short before the standard neckline break. You can also use a break of the pivot that leads to the right shoulder peak as entry.
I wrote: Price came to our zone, put in a bounce followed by higher low. Break of high is entry for 187 pips.
Remember, I was looking long due to lack of momentum to the downside.
- Price failed to make lower low. Entry at the break of the high.
- Price made double bottom. Entry at the break of the candle that made the double bottom.
On my charts, the second low was a little higher but regardless, we are also looking at a double bottom (no, it does not have to be perfect). Due to being on alert for long trades, you can also place your order to go long if you look at this second bottom as a trading range. The higher low was not really the sign for me. It was more the double bottom pattern. We are entering a higher time frame pullback using a lower time frame breakout.
I wrote: Nice failure test off of lows and momentum candle steps in. 259 pips upside.
His response is: Price made double bottom. Entry at the break of the candle that made the double bottom. I am unsure of your failure test entry followed by momentum candle?
I get the confusion on what I wrote. I am not looking at the far left of the chart. I am looking at the higher low prior to his arrow. Price made a momentum move down, based, and broke down again but the low held. On the original post I had stated I was already looking for a long from this zone.
Again, my chart looks a little differently and this is not a pure failure test of lows which can be strictly looked at as a single candle. I have the experience to look at this price action and note that this is a weak break. There is no juice to it. To me, that is a test of lows and since no seller stepped in, it’s ripe to move up. Given the context of what I was looking for, I just get the trade on.
On the setup chart, I had written to be wary of longs due to resistance overhead. I wanted to see rejection.
On the recap, I had written: Trend line break entry leads to 100 pips downside as price broke our zone and failed in the pullback.
He wrote: Price broke trendline. Entry at retest after the trendline break when price rejects and breaks rejection candle.
That is correct. Take note of the momentum to the downside AND the context we found ourselves in. This was a solid rejection from an orderly rise in price prior. When price bases, you can play any pullback (especially if there is momentum prior to the pullback), play the break of any range, etc.
We are NOT playing a trendline break setup. We use the trendline break as an entry mechanism into a higher time frame pattern.
The context was we were in a zone where we expected a reaction. The other consideration was this up move was the second leg in a complex correction. Shorts were the play.
The recap was: Another pair that we believed was in a complex correction looking short. 140 pips downside off the “head and shoulder” entry.
He wrote: Price made head and shoulders pattern – entry at break down of right shoulder. Happens twice – a small and a bigger pattern.
This is correct. Again, context matters and we were already in a short trade mindset. Traders that missed the original did have another shot but that will not always be the case
Trade Entries Don’t Have To Be Perfect
What should be clear is that an entry into a trade takes on many looks. There are times that you just “get the trade on” during a price range without waiting for a breakout or failure test.
With experience, you can see the lack of interest in a certain direction with price. You will be look at an expectation and when that fails to materialize, the opposite if probably the better idea.
What does that mean?
If price races into a potential support area with momentum and then interest suddenly dries up, a move up is probably in the cards.
Very useful feedback – thanks a lot.
Am I right in assuming, that you usually uses 2 x daily ATR as risk (using setup chart) even though you use a 4 hour chart as entry?
What are your thoughts on using structure – like the recent highs/low for stop placement instead? Smaller stop = greater potential but also greater risk of getting stopped out.
Have a great weekend.
I do generally use 2X ATR unless the stop is ridiculously too far away from price. Structure can be dangerous because that is where everyone is taught to put it. I like volatility measures. If price is going against me twice the average range, it was probably not a great entry.