Wait for the first Rally/Correction

[Jaydee]

Hi all

It's been sometime since I actively posted my thoughts, advice or opinions on trading, so I thought I may reintroduce myself to the community by offering a small piece of advice to new traders who may be struggling. This bit of advice has helped me no end in achieving consistent results by making my trading actions and decisions more consistent.

If you are trading breakouts for longer term trades (not scalping) and are finding it hard to hold on to trades when they initially go your way and then reverse back, just wait for the first rally or correction. Have a look at the attached June FTSE chart to see what I mean:

You get in at the white arrow, you get into profit, your initial profits start to evaporate as the market rallies (red circle) - you are going crazy! What should you do?

Just hold - leave your stop where it is and hold position. Sure, sometimes the market will stop you out, as the rally turned into a reversal, but that happens. Other times, you will be able to run your trade 5 - 10 times further just by weathering out this first rally (or correction).

So, if you are struggling to hold onto your breakout trades, ALWAYS hold through the first correction (for better or for worst, richer or poorer, etc). Simples...

JD

 

[Technically Fundamental]

Suppose it just takes getting used to. I'm a coward tbh.

 

[Jaydee]

Suppose it just takes getting used to.

It does and it's hard to do because the survival instinct kicks in to take profits early. But you have to overcome that - at the end of the day, having no expectation on a trade's outcome is the best frame of mind to be in. Easier said than done. However, if you aren't particularly stout at heart, try putting a stop in and walking away for 30-60mins. This isn't a bad idea if trading a longer time frame - it removes your instinctive reactions to the trade in the initial stages and stops you from running scared.

Don't get me wrong, if you only wanted to take the short downswing before the rally that's fine too. However, I posted this to try to give some people an idea of what to do to gain consistency in running their trades. Waiting for the first correction is an easily definable goal, so I thought it may help newbies who could give it a go. Of course, what to do after the correction has past is another subject entirely - we'll save that for another day.

 

[jackolan]

Good post. Thanks.

When does a correction become a rally? I currently set my automated stop at the average daily volatility, but am indecisive as to when to actually pull the trigger manually... I'd love to bring my stop in closer but the volatility gets me every time, my win/lose ratio goes way down (of course, the value of the loss is less, but several losses at less value equals one loss at higher value!)

Jack.

 

[Jaydee]

Good post. Thanks.

When does a correction become a rally?

Hi Jack

Sorry to have confused you, a correction is a rally. When the market's main movement is down, it corrects back up temporarily as a rally - or, when the market's main movement is up it temporarily corrects back down before continuing on the way it was going.

So, that said, I'm assuming you mean, when does a correction become a reversal making the move, essentially, a false break? Well, if we take the FTSE example, the break point on the chart was about 4326. My stop would need to be high enough to wear through any uncertain noise but low enough to prove that the trade was a false break. Some, like yourself use ATR to judge this, some rely on their feel and orderflow analysis and others use a stop just above the technical level. Whatever you feel works for you is the best way.

Personally, I had been watching the orderbook closely and found there was selling at 26 - consequently, I was in at 23.5 (slightly late) with my stop at 30. After the first correction, my stop was moved to 20 - I was slightly offside during the first correction. Therefore, if my stop had been hit, I would have regarding the market as most likely to be reversing.

Some advocate very tight stops (they rely on the market moving immediately in their favour), some say looser stops based on volatility (I am more inclined to side with the latter) but if you are still unsure, you can analyse your stops by looking at them in this light:

You can only be stopped out for 3 reasons:

1) The direction was wrong
2) The direction was right but your stop was too tight
3) The direction was right, your stop was adequate but you hesitated on the entry getting in too late and you were stopped out in the correction.

(4) Have to be careful with this one - not all will agree with me here. Sometimes, you can be stopped out because you were plain unlucky from a spike.

Even if you aren't stopped out and your trade is profitable, ask yourself how many ticks offside were you at the most and what was your stop. If your stop was 30 ticks and the most you got was 5 ticks offside, then clearly, your stop is far too loose.

I can't offer you any truly tangible advice because the market is often random. Notice I said earlier that if the market had hit my stop at 30, I would have regarded it as 'most likely' to be reversing. I didn't say it defiantly would reverse because, when I'm stopped out, I don't know if I should have stopped out exactly there until after the event. That's what makes this game so frustrating and enjoyable at the same time.

Sorry for long post - hope it's not too garbled.

Time for bed

 

[jackolan]

ask yourself how many ticks offside were you at the most and what was your stop. If your stop was 30 ticks and the most you got was 5 ticks offside, then clearly, your stop is far too loose.

Yes, of course... Duh! Thanks, tomorrow will be spent digging through my records!