Wot next? number 2: trade management

[barjon]

ok, slightly different slant to this one.

Please don't try to identify the instrument - I've removed prices as well to make that more difficult :cheesy: - just take it as you see it.

To give overall context for Tony, the first chart is a weekly chart; additionally the market overall had been rising steadily and had just retreated from a new high and gone down to breach it's last swing low at a time coincident with the "on the close" downward break seen on the daily chart of the instrument in question.

Right, our intrepid trader has watched this instrument fail to make new highs on the weekly chart after a fall from new highs that breached an earlier swing low although the 50ma is still rising (naughty boy might be about to ignore one of his conditions here ).

Mostly, however, he is intrigued by the 36 bars long congestion zone which is fairly tight on a closing basis. He wants to trade a break out from that zone. He enters short at the red line after such a breakout which persisted on the close for 4 bars. He has not set a stop but has it in mind to exit at the best price available following a close above the congestion zone - that'd be about 20 points at best.

The next day starts well but finishes printing a hammer on fairly high volume with a close very near his entry level. The next day worse - a gap opening and a close back in the congestion zone. He is underwater now, but only at the shallow end. The next day - our cut off point on the chart - another upward gap opening but the price doesn't hold and drops albeit still a higher close. It's on very high volume too, but the water's got deeper.

Gulp, what's he going to do now? He's still not near his stop loss area, but should he wait any longer or would getting out just be a panic move? Decisions, decisions.

So, guys, wot next?. How would you take it from here and advise our hapless friend?

good trading

jon

 

[Splitlink]

A fine pickle you've got me into!

I think that this is going to break out on the upside. I'd close the short trade and reverse into a long trade.

I would like to say that I would have gone long lower down but no one would believe me, anyway. Nevertheless, it's true--- where the minor breakout occurrs in the previous bar.
My stop would be just under the low at the left of the chart but it depends on what you haven't told us. How far away it is from the risk/reward angle. If I thought it to be too far I'd try a mental stop to get me out sooner.

Split

 

[TheBramble]

Sorry Jon, going to be a spoilsport and moan. The thing is, I only trade with a full set of charts across a number of markets and timeframes. While it’s possible to offer theoretical outcomes based on just these two charts, the value of these analyses will be extremely low.

Taking price off also reduces the ability to calculate Fibs (for those that like to play Fibs) and decades, quarter, half and full centuries etc. Next you’ll be hiding the volume too.

The other issue the ‘breakout’ – where’s the breakout volume? There isn’t any.

And the re-test, which would be a primary, not a secondary, prerequisite for borderline breakout wasn’t considered.

He’s gone in without setting a stop, without establishing target, without waiting for confirmation of a breakout from what is a borderline breakout at best. The bottom channel line is too high. The breakout and 3rd bar after breakout (correctly adjusted bottom channel line) close toward the high of the bars.

He shouldn’t have gone short where he did. If he did, he should have existed on the next bar given the price action and lack of delta to volume.

He needs to wait (if he’s Bearish) for the bottom channel to be breached on relatively high volume for it to possible to calculate a valid R:R.

For greater caution and chance of success, he’d wait for the breach of the prior lower low 14 (or so) weeks back, depending on volume of course. If you’re trading daily bars you (he) needs to be trading with the primary cycle. It’s only the intermediate that’s down until that 14 week prior lower low gets taken out with vengeance.

 

[barjon]

Tony

You can advance many reasons why or why not he should have entered this trade and reasons why he should or should not still be in it. I don't necessarily agree that the channel is "incorrect" - he is working with closing prices remember - but that's a bit by the by.

The point is that he is in this trade, like it or not, so where to from here?

From what you say, I guess your position is that he should quickly recognise it as an ill-judged trade and get out regardless at the first opportunity (ie: next day opening or thereabouts)?

good trading

jon

ps: I did give you a summary of the overall market as well, albeit not a chart

 

[senyorqueso]

Hi Jon,

Good threads - i'll venture an opinion then - looks like a silly trade to get into in the first place, but a good warning sign given by the following days candle to get out. And if that wasn't taken, just get out anyway.

Go on then, tell me it's going to plummet now

SQ

 

[chump]

what a naughty boy !
With such an entry (yuk) I would have been out on the same bar however the last bars shows some stops have already been taken out as the gapping looks to me like short covering and not necessarily active buying. On this range play I am assuming your stop is over the top of this range and that your money management is comfortable with that risk. So , at the moment leave the trade alone and see what happens next. We've got some nice gaps to fill and you still have a chance to at least get a better exit and if the volume works you might even find the trade goes where you thought it would.

 

[StupendousTrader]

ok, slightly different slant to this one.

Please don't try to identify the instrument - I've removed prices as well to make that more difficult :cheesy: - just take it as you see it.

To give overall context for Tony, the first chart is a weekly chart; additionally the market overall had been rising steadily and had just retreated from a new high and gone down to breach it's last swing low at a time coincident with the "on the close" downward break seen on the daily chart of the instrument in question.

Right, our intrepid trader has watched this instrument fail to make new highs on the weekly chart after a fall from new highs that breached an earlier swing low although the 50ma is still rising (naughty boy might be about to ignore one of his conditions here ).

Mostly, however, he is intrigued by the 36 bars long congestion zone which is fairly tight on a closing basis. He wants to trade a break out from that zone. He enters short at the red line after such a breakout which persisted on the close for 4 bars. He has not set a stop but has it in mind to exit at the best price available following a close above the congestion zone - that'd be about 20 points at best.

The next day starts well but finishes printing a hammer on fairly high volume with a close very near his entry level. The next day worse - a gap opening and a close back in the congestion zone. He is underwater now, but only at the shallow end. The next day - our cut off point on the chart - another upward gap opening but the price doesn't hold and drops albeit still a higher close. It's on very high volume too, but the water's got deeper.

Gulp, what's he going to do now? He's still not near his stop loss area, but should he wait any longer or would getting out just be a panic move? Decisions, decisions.

So, guys, wot next?. How would you take it from here and advise our hapless friend?

good trading

jon

Hi Jon:

First, your write up shows that the Trader does not know how to interpret Candlestick Charts. No experienced Candlestick Trader will make such a mistake. Now, take a look at your Daily Chart to which I have affixed some labels. Signals ABC created a Morning Star which is bullish. Signals BCD immediately created a Bearish Evening Star to neutralize the Bullishness. This is a warning to the Trader to be cautious. The Trader should not have initiated the trade on signal D (the red mark). He should have waited the following day for confirmation of direction.

The following day, signal D is a Bullish Harami/Hammer at the bottom. This confirms the bullishness of the minor trend. This hammer is very interesting in that the Bears pushed the price all the way down to the bottom of the shadow, creating a long black candle. The Bulls fought back fiercely and pushed the Black candle back up and had the audacity to turn it into a white candle, creating the Bullish Harami. This shows that the Bulls were very powerful and in control. This is when the Trader should have joined the Bulls by going long at E. As they say, the rest is history.

The Trader made a wrong entry at Signal D. He started losing at signal E the following day. He should have closed his positions at the gapup the next day. Furthermore, it is very foolish for any Trader to initiate a Trade without setting up his stop first. A Trader should know how much of his equity he is ready to lose in any particular trade before starting the trade. This is part of Money management.

 

[barjon]

the general consensus thus far is that our trader has made a pretty daft trade for one reason or another and should already be out of it.

That's not the object of the exercise though. The point is that he is still in the trade at this stage. Whether he recognises it as a silly trade or not (and he must be becoming suspicious by now :cheesy: ) what does he do from here on?

The trade has gone against him, so does he live with his "stop" of exiting at best after a close above the range? Does he fix a hard stop (where)? Does he cut and run straight away? Or what?

good trading

jon

 

[Splitlink]

the general consensus thus far is that our trader has made a pretty daft trade for one reason or another and should already be out of it.

That's not the object of the exercise though. The point is that he is still in the trade at this stage. Whether he recognises it as a silly trade or not (and he must be becoming suspicious by now :cheesy: ) what does he do from here on?

The trade has gone against him, so does he live with his "stop" of exiting at best after a close above the range? Does he fix a hard stop (where)? Does he cut and run straight away? Or what?

good trading

jon

Hi Jon,

My advice in post 2 still stands. If its no good, I'll get out somehow!

Split

 

[StupendousTrader]

the general consensus thus far is that our trader has made a pretty daft trade for one reason or another and should already be out of it.

That's not the object of the exercise though. The point is that he is still in the trade at this stage. Whether he recognises it as a silly trade or not (and he must be becoming suspicious by now :cheesy: ) what does he do from here on?

The trade has gone against him, so does he live with his "stop" of exiting at best after a close above the range? Does he fix a hard stop (where)? Does he cut and run straight away? Or what?

good trading

jon

Hi Jon:

There is no debate about this. Get out now and then reenter if the market changes it's mind and goes in the same direction. Why stay stuck in a losing trade when there are other opportunities to put one's money in.

There are three fundamental rules in successful trading. (1) Always preserve your capital. (2) Don't ever forget rule number 1. (3) Always follow the price. If you obey these three rules, you will always make money. These three rules indicate that you must always use stops to protect your capital and thoroughly understand candlestick signals or any other signals you use, to follow the price but not predict the price.

 

[chump]

Jon,
I stand by what I have said. Entry on what is a price range (for me) was not good and the best exit was missed BUT adapting to this at this point your stop has not been hit AND MOST importantly the trading against you is rampant with gaps to fill. On that basis I would stay in the trade. Moreover on the weekly chart the last high was formed on lower volume than the prior high so I think you are directionally right. For me this is do not do a.............
1. Joe Bloggs trade 1 and panic just because price has moved against you ,but not threatened your stop which should be hard.
2. Do not go on autopilot and do a Joe Bloggs trade2 panic and exit if the trade comes back to breakeven.
3. Do do a thinking mans trade...look at the action...gaps...do look at the bigger picture ...do consider what happens to volume if this moves back in your favour.

 

[StupendousTrader]

Jon,
I stand by what I have said. Entry on what is a price range (for me) was not good and the best exit was missed BUT adapting to this at this point your stop has not been hit AND MOST importantly the trading against you is rampant with gaps to fill. On that basis I would stay in the trade. Moreover on the weekly chart the last high was formed on lower volume than the prior high so I think you are directionally right. For me this is do not do a.............
1. Joe Bloggs trade 1 and panic just because price has moved against you ,but not threatened your stop which should be hard.
2. Do not go on autopilot and do a Joe Bloggs trade2 panic and exit if the trade comes back to breakeven.
3. Do do a thinking mans trade...look at the action...gaps...do look at the bigger picture ...do consider what happens to volume if this moves back in your favour.

Hi Chump:

It all depends on how much equity or fund is at stake. If you have just one or two lots of say GBP/USD currency pair costing about $5,000 or less in a $100,000 Account, then you can wait it out because you are with the main trend and you have a lot of cushion. If on the other hand, you just have $10,000 to play with and you are in the same hole, then you'd better get out quickly before you lose your shirt. Trading is not a game but a business.

 

[TheBramble]

The scent’s gone cold on this one….

These types of threads are an interesting phenomenon Jon. I remarked on a similar thread where I had done a fairly deep analysis of a stock another member had selected (at random?) that I thought the interest would be in the process of the analysis itself, rather than the outcome or the trade potential. I was wrong.

Seems that most are only interested in something that’s quick, easy, sure fire and spelt out really clearly. Anything that requires even the remotest amount of effort or worst of all, the sheer imposition of original thought, gets passed over quickly or ignored.

Don’t want to make this my war cry, but it really does appear that those that least need to take the trouble, do, and that’s probably why they least need to.

Anyhow, for the benefit of those who have made the effort if nobody else, how did this one eventually play out?

 

[TheBramble]

It all depends on how much equity or fund is at stake. If you have just one or two lots of say GBP/USD currency pair costing about $5,000 or less in a $100,000 Account, then you can wait it out because you are with the main trend and you have a lot of cushion. If on the other hand, you just have $10,000 to play with and you are in the same hole, then you'd better get out quickly before you lose your shirt. Trading is not a game but a business.

With respect ST, that's not it at all.

If I have correctly interpreted what you’re saying, the decision on whether to stay in a ‘bad’ trade is governed by the percentage of your trading capital at risk?

If so, that’s wrong – just plain wrong. Your percentage capital at risk should never by more than a small percentage (less than 1% typically for most traders who have been in the game long enough) - and ends up being roughly the same size on any given trade.

The rightness or wrongness of the trade is determined by your initial R:R, your initial stop, trailing stop and current price, volume and time development and proximity to target. You’re either still in a trade or out of a trade. There’s never any sense staying in a ‘bad’ trade.

I fully support your previous comments on getting out and re-entering if you get a better position to re-enter from- that makes a lot of sense. Particularly on this instrument at this time.

Chump, your comments about adapting to the situation could be misleading for newbies. I say that as that’s what most newbie traders actually do. They get in on the wrong foot, then find all manner of ‘justification’ for staying on the hope it’ll turn around. OK, I agree with you the stock looks weak for the reasons you suggest (dunno about the gaps though), but to suggest these factors are sufficient motivation for staying in a bad ‘un may not be the best advice to have given a less experienced trader. And the stop hasn’t been hit, true, but the stop Jon mentions is not set, he ‘has it in mind to exit at the best price available following a close above the congestion zone’ which is pretty flaky I think you’d agree? I think Jon was deliberately setting us up with a newbie type trade and wanted to test our mettle.

 

[Splitlink]

These types of threads are an interesting phenomenon Jon. I remarked on a similar thread where I had done a fairly deep analysis of a stock another member had selected (at random?) that I thought the interest would be in the process of the analysis itself, rather than the outcome or the trade potential. I was wrong.

Seems that most are only interested in something that’s quick, easy, sure fire and spelt out really clearly. Anything that requires even the remotest amount of effort or worst of all, the sheer imposition of original thought, gets passed over quickly or ignored.

Don’t want to make this my war cry, but it really does appear that those that least need to take the trouble, do, and that’s probably why they least need to.

Anyhow, for the benefit of those who have made the effort if nobody else, how did this one eventually play out?

The chart doesn't tell me whether the trade is going to be long term or short, because there is no time scale on it. If it is a short term scale then the reader must be thinking short term, himself, surely? If it is a daily one, then the approach can be more leisurly.

Split

 

[chump]

Tony,
I understand what you are saying re Newbies , but in this trade we don't have those circumstances described...bad trade and justification for not seeing it. Staying objective , a trader has entered here on a b/o and set a mental stop behind the range. There is absolutely no reason why that is wrong for establishing risk. Were there different setups to be preferred ,yes , but those are academic at this point. Trade management from that entry even until the first chart of it was posted was not good ,but we can't do anything about that either.
We now have a specific situation to read and my reading is simple, the stop is intact and the interim trading against the position would not at this point warrant me moving the stop and getting out at this time because I want to see what happens to those gaps.

 

[TheBramble]

The chart doesn't tell me whether the trade is going to be long term or short, because there is no time scale on it. If it is a short term scale then the reader must be thinking short term, himself, surely? If it is a daily one, then the approach can be more leisurly.

Jon provided weekly and daily charts so I was working on the basis it was the daily we were working toward.

As for trade timeframe, it certainly ain't no scalp...

...on the other hand.....

.....it might depend on how long it takes to get back to B/E....

 

[TheBramble]

We now have a specific situation to read and my reading is simple, the stop is intact and the interim trading against the position would not at this point warrant me moving the stop and getting out at this time because I want to see what happens to those gaps.

You're right. I was too much into why I wouldn't have gone in and why I would have got out straight away had I been thrown in. Still a valid viewpoint for me, but in no way detracts from the point you make.

 

[barjon]

.....................I think Jon was deliberately setting us up with a newbie type trade and wanted to test our mettle...............

Got me, Tony - not so much to test your mettle but to provoke some debate between the "cut and run" corner occupied by ST (and yourself) and the "wait and see" corner occupied by Chump.

It seems to me that there are valid arguments to be put on both sides which are affected by the action leading up to the trade and the action thereafter. Contributors have advanced some of those arguments and reasoning but, like you, I'm a bit surprised it didn't provoke more.

Anyway, the chart shows how it panned out. Our trader never did get his close above the range - but he'd have had a couple of nervous moments as it spiked above intraday -and the trade "came good" to some extent.

For my money I'd have been quick to go (the next day hammer on higher than average volume did it for me) which I think is the safer route. If I'd still have been in at the cut off point I'd still have gone unless there were definite signs of weakness, although I appreciate Chump's reasoning. I was surprised that there was little comment about the very high volume associated with the cut off candle.

good trading

jon

 

[chump]

My reasoning was specific to the first chart you showed. I didn't like what had gone before...me, I would have gone short top 15% of range with stop even higher beyond a fade trade with a limit for half bottom of range and an exit on a fade of the b/o you took.
Your chart however was a fait accompli and on that basis I thought the trade against the position shown on your chart were actually setting me up to go short had I not already been in so why would I exit ?
My points about "panic reactions" were made because I bet money most newbies have done one ,or both of the actions I suggested rather than just looking at the price action. It's an emotional reaction for them and perhaps not just them.....LOL

Jon, Just to postmortem...tactically explain this for me in logic I can follow...take a b/o of a range , establish a stop behind the range , exit whilst still in the range ..I can't see how those three elements together make logic tactical sense. If you are willing to exit when faded why have your stop so far away. If you're happy to have your stop back there then you are implicitly saying you will allow your position to be faded.
By contrast if you read what I would have done tactically it makes logical sense because it acknowledges that if wrong it will be because the trend is continuing that is by breaking out against me first and then by giving me a chance to see what volume on a pullback signifies...now under those circumstances I could actually get out sooner than my stop ...do you see what I mean.