Thursday, May 24, 2012

Selecting the optimal entry


One of the most challenging tasks for any trader including experienced traders is to hold through what looks like chop and take their trade all the way to a swing. Sometimes this is easier when the pullback and congestion is far away from your entry price or you are already in a trend and the price moves away from you favorably right away.

When a trend terminates, determining which entry will lead to a large move is called "The breakout problem" and is a considerably difficult task. To do this, you need to be able to first determine when the trend has actually terminated.

A failed reversal followed by a failed A2 (b54,55 and b61,62) is a classic sign of trend termination. Waiting for a trend to terminate before taking a trade saves you from two non-swing entries (b58 and b64).

Once the trend is terminated, you need to evaluate the chances of a reversal. On a trading range day with bull strength displayed earlier in the day (b6-22) and recently (b55-61). The chances of a move to the other end of the range are decently high. On a strong bear trend day, this would be a lower probability trade.


9 comments:

  1. Hey Cad,

    great that you're back, really love your education!!!

    A question - where is the correct entry for a failed H2/L2? Like for instance the bar 68 L2 - is the entry above bar 68, or bar 69 (the entry bar), or bar 67 the largest pullback bar?

    Thanks!!

    ReplyDelete
    Replies
    1. In general, you should enter above a bar with a strong close.

      The theoretical failure is above b68. However, when the entry above a strong bar (b70) is likely to cause a failure, you should enter above it.

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  2. Cad;
    Sorry for the grammar of the language, until I started to learn English (I'm from Poland).
    I would firstly like to thank you for your blog. That to me is extremely important that I can learn from your articles. They are very valuable.
    I am a novice, losing trader. But I'm learning.
    Cad-one question and a request to you:
    Am I considered a bar 64 (as signal bar) as W1P? or like you are pointing at, wait for the 2nd entry Long Bar 71? I saw bar 65 as the entry bar for W1P, especially after the DB bars 57-63. A few words of comment?
    Request: when I'm looking for articles about trading (which is difficult, except yours) I very often find the issue of testing (for example, LOD, HOD, COY, open gap, test first bar, and so on). It is very difficult to find real, true explanation of why this test is so important. Much is said about it, but no one can clearly explain the issue (so that the beginner to understand.) I understand that this is a basic, very important issue. Very you please, whether that would be a chance for your article on this issue, or more explanation? Thank you
    Jarek Poland

    ReplyDelete
    Replies
    1. I will certainly create a post on those

      Delete
  3. Cad
    sorry for the grammar
    As a beginner I have a question - I go back to the bar 64 (Inside bar). When this bar was formed , could I treat it as W1P? with the first entry (see DB 58-63 bars), or whether it would be the correct to wait for the 2nd Entry Long to bar 72?
    Jarek
    Poland

    ReplyDelete
    Replies
    1. When the setup is overlapped or made by poor bars, its always best to wait for a second entry.

      Delete
  4. Cad,

    Bar 70 looks like a valid A2 to me for a bull trend which could have been reversed after bear trend line break at b61 (b61 was the first pullback to EMA, then it failed, bar 67 - the second one and it failed, so bar 71 was a valid A2 entry)

    W1P is more like bar 58

    They way I read the price action between b55 and b71 is the following:

    1) we had a pretty average double wedge at bar 54 (I didn't like the lower tail at bar 54 and then entry bar was an outside bar which is not a very good sign too) which have broken the trend channel line though. So the best option for us will be to wait for the second entry after the trend channel is broken.

    2) we could have scalped W1P at inside bar 58 for 1pt to EMA, but seemed a bit risky esp. after possible trading range created by outside bar 55;

    3) Double top, inside bar B62, but potentially A1 of a new bull trend (or failed breakout if we're now in trading range) - but surely not A2 as we have just broken the bear trend line.

    What I didn't like here is that:

    1) the signal bar is at EMA;

    2) it's almost 3 pts so we should have traded half;

    3) not much space for a swing entry - only for a 2pt scalp;

    4) signal bar was shaved so I wasn't getting a perfect entry here as I would had to enter at market;

    So I skipped that one.

    3) Bar 71 looked like a perfect A2 for me so I entered it for 3pt as I wasn't expecting strong reversal here

    So what do you think?

    Thanks

    Do you think I am wrong anywhere here?

    Thanks

    ReplyDelete
    Replies
    1. When the price action is ambiguous like this day, you could read it in more than one way and come to correct conclusions. Overall your read is correct and validated by your successful trades.

      The only adjustment I would make is regarding bar size, they must always be compared relative to recent bars. Secondly, a dip beyond a barrier (ema,TL,etc) that is rejected right away such as b62 often lead to strong moves.

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