Wednesday, February 29, 2012
Getting shaken out II - Poor setup bar.
Often in the heat of the moment or out of boredom or desperation or a fear of missing out, you may end up entering on a less than ideal setup. This happens to the best traders and I'm not sure if there is ever a cure for it. Although these trades may eventually work, you may have to sit through a multi-bar pullback. The more pullback bars you have to sit through, the greater the chances you will get shaken out of the trade.
A great example is b29. Its an inside bar after a very strong leg off a W. You may buy above it expecting a large breakout bar, but right after entry it turns into a bearish outside doji bar. Such an entry bar is extremely demoralizing and the trader will begin to see everything that's possibly wrong with the setup bar. It was a 3t doji bar with one body at ema. The entry bar gave a double top with the prior swing high. A second L could turn into an A2 short, etc. The likely result is that the trader will exit at a small loss and the price immediately starts moving up.
A second example is buying above b46 (instead of b47). Given that b46 is a bear bar, an H2 above it is highly likely to result in a pullback. The trader may start seeing similar arguments as to why the entry was incorrect and exit at breakeven or strong loss just before price starts moving. Technically, both entries worked. b28 low and b46 lows were respected. But 6t stops were hit. When signal bars are larger, larger fixed stops are also likely to be hit.
Note that waiting for a strong bar (b33, b47) would have prevented poor entries. A strong bar such as b47 often will insulate you from poor entries since sellers are likely to sell the close of that bar, preventing it from triggering. A poor entry will often give a second entry (b49 with b46) that will often have a better close or lower risk. Those should help you avoid being shaken out.
In general, only taking setups where you are likely to get a strong entry bar is the only way to avoid getting shaken out. These include A2, G2, W1P and 1PB.