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Once a major high/low breaks I'm in continuation mode and look for those exact pullback entries. I'll take them as long as the new highs/lows aren't weak and as long as the 1-min 20EMA holds as support/resistance (meaning a 5-min bar hasn't broken in the opposite direction by more than a few ticks).
The rest of the day was range/chop, so there were no more of those setups, because the trend had ended. The easy money trades were done and unless you have a lot of experience trading range/chop price action, you did the right thing by staying away.
On the second setup you mention, I didn't take it as a first entry (though it worked out fine). I was concerned about my stop loss placement because that big containment bar low and the 1-min 20EMA were too far away. I did however jump right in when the second entry set up, long the break of the 8:09 CST bar because then I felt good placing my stop below 97.84 (which would trigger a potential reversal to the 1-min 20EMA at the very least).
There was a 60-min bull flag measured move target at 98.26 that set up between yesterday just before the pit open and the bull flag action in the overnight session. Amazingly price hit 98.25. It's rare that a measured move end up so exact.
Statistical analysis provides the information necessary to create a profitable price action trading plan. If you test a setup that looks promising by analyzing, say, 500 consecutive appearances of the setup, noting maximum favorable and adverse price swings off various entry methods, describing the price action context surrounding each trade, and identifying contextual filters to exclude trades under certain unfavorable conditions, you are quite likely to end up with a positive expectancy trading plan at some point.
That’s the easy part.
The difficult parts are learning to identify the valid setups in real time, and trusting the positive expectancy of your plan by trading all appearances of your valid setups according to your rules.
A humorous analogy of this is offered by Dave Barry in his book Stay Fit And Healthy Until You’re Dead:
“And remember how, in Biology Lab, you were supposed to take an actual dead frog apart and locate the heart, the liver, etc. as depicted in the elaborate color diagrams in the textbook? Of course, when you cut it open, all you ever found was frog glop, because that is what frogs contain…”
Well, your positive expectancy setups as seen in real time, at the moment when you’re supposed to actually initiate a trade, often look like “frog glop” compared to the perfect after-the-fact chart annotations provided in trading books and on-line resources everywhere.
As a result, it’s tempting to second guess the trade signal, hesitate, miss the proper entry, watch the trade working nicely, and find oneself in a state of mind that is not conducive to disciplined trading.
If you haven’t yet screen-captured various forms of your setups at the hard right edge (before) and following a successful result (after), do it now and memorize those “before” patterns until they no longer look like “frog glop”.
When you see a valid setup forming and you find yourself thinking “Yeah, but…”, have those screen captures handy to remind you that this is exactly how it’s supposed to look. Then look at the “after” picture, take a deep breath and place the order.
I had the pleasure of chatting with an oil trader today whom I hadn’t spoken with in many, many months. The first time we chatted he explained his trading framework and I explained mine. I didn’t know much about his thought processes while trading, but today as we shared some of our thought processes in real time, I realized how similar we are in many respects despite the fact that our methods of trading the same instrument are quite different.
It got me thinking about the consistently profitable traders I’ve observed over the years, all of them very different in approach and instruments traded, yet all sharing certain traits that can make the difference between profit and loss over the long run.
The first thing is a basic trading plan. Something signals a potential trade and if price does X, we do Y, and then we manage the trade according to certain rules, all prepared in advanced. There’s no room for cheating. When I was a struggling newb without a specific plan (okay, I had a very loose plan that I followed sometimes), I’d think it was crazy that these guys would give up an opportunity just because they wouldn't jump in a few ticks early, or chase an entry, or move stops to break even after a certain favorable move, or take profits a few ticks early when price seemed to stall, and so on. I had no idea how important a plan was and how important it was to follow it with extreme discipline. To all the disciplined traders out there who developed a solid plan and stuck to it, I offer my greatest thanks. I gave you guys massive sums of my money to learn the hard way how to be consistently profitable!
The second thing is the ability (for the most part) to shake the old Etch-A-Sketch as soon as a trade is done and be ready for the next opportunity with a clean slate. I watched one trader put on five losing trades one day (out of five trades taken) and at no point in time did he hesitate to trade the next valid setup, nor did he change his plan and manage any trade differently. I watched another guy take a massive 6-figure hit due to a fraudulent press release about a buyout, giving back at least half a year’s profits in a matter of minutes, and get right back on the horse to trade the next valid signal that came up. Something I’ve seen common to all the profitable traders I’ve met is a sense of detachment once a trade is done, followed by anticipation of the next opportunity.
Much later, after hitting a very low point in my trading journey, I began to learn how to trade based on probabilities, and developed my own plan. I then embarked on the long journey of learning to trust it.
I still occasionally lose focus, hesitate and miss trades, and micromanage a trade-in-progress based on the result of a previous trading error, but these mistakes are quite rare now. It's as if the core concepts of my trading plan have been burned into my psyche and no matter how badly I think I'm going to miss out, or how disturbed I feel over taking a scalper's profit at a channel line only to see it break with a vengeance on the first approach and run 40 more ticks without me, the thought of doing anything without evaluating the likely risk:reward first, causes me to instinctively place my hands in my lap and take a deep breath first.
Another thing I find very helpful is to think one move ahead when preparing to place an order. My thought process once a valid setup appears is generally like this:
1. The entry price would be here, and the stop loss would have to go at least there. That works.
2. The minimum favorable move before a possible S/R level is reached is N ticks. OK, good, the risk:reward ratio works.
3. I’ll definitely trade this one. If I’m stopped out, I’ll [advance plan is contemplated].
That last one is really important to me because it helps prevent me from carrying emotional baggage regarding a trade that’s over. Planning in advance what to do if stopped out of a trade makes it easier to shake the Etch-A-Sketch and be ready to start fresh.
The attached chart is a 1min chart setup I use as an intraday scalper. I keep the 5min 20EMA on it (orange line) by selecting the 100-period EMA on the 1min. In a trend or strong trending move, a pullback to the 5min 20EMA can be a good with-trend entry, but I've found it best to get in early off a 1-2-3 pattern on the small 1-min time frame, because the 5min 20EMA is one of the least reliable S/R levels, and the 1-2-3 pattern offers a low risk entry price and method, IMHO.
(Tom, hope this demonstrates what I was talking about.)
It is more clear now as I am looking at the chart with your explanation here. I can see that sometimes I am getting in a bit early and can be a bit more patient with entries. I didnt see the possible short entry off the 1-2-3 pattern but can see it now. I think Brooks talks about 20 bars away from the 5 min 20ema and a possible touch was instore,,, (the ema was too close for me),,But as I didnt see that before it would have maybe helped me think long with stops above as you mention to fuel a move up. I can see that I am not paying much attention to the 1 min ema and you mention this often and will now keep an eye on that more. This was very helpful as I second guess myself especially in "Frog Glop" and a better read may help with confidence. The trade I made eairler in the day I told you about needed a bit more patience and I rather miss than get in too early in possible. Many thanks for your help.
Once you have a trading plan (business plan) that offers positive expectancy if followed with discipline, you learn to apply it to the market in real time. For swing traders, there’s plenty of time to prepare for trades and to manage them. Day traders, however, may be making the equivalent of multiple “swing trades” each day, and they need to stay focused so as not to miss opportunities, be able to quickly evaluate the market environment, recognize setups at the hard right edge, calculate risk:reward and position sizing, manage the trade appropriately, and shift gears when price changes its story.
I trade oil futures which offer plenty of intraday trading opportunities. Without getting into specific setups and prices, I’ll recount my first two morning trades within the context of a trader’s mindset:
Preparation: Shortly before the pit session begins at 9:00am ET, I notice price has formed a symmetrical triangle around a fairly flat 20EMA on my main 5-min chart and I draw the lower and upper trend lines. These trend lines are automatically duplicated on my 1-min chart (which I use for precision entries based on the 5-min price environment and price action signals). A price swing to the upside is in progress, but I’m way too late for the long trade because price has already traveled nearly 20 ticks from my in-plan entry price and the upper trend line resistance is only 5 ticks away.
Trading: Price pulls back and signals a possible short. I immediately look at the 1-min chart for the price at which I would offer to sell and check the price at which the nearest technically reasonable stop loss could be placed. The potential cost of the trade is acceptable. I then check the value of the lower trend line at that point in time, which is the first reasonable profit target zone should the trade turn out favorably. The potential reward is more than 50% greater than the potential cost of the trade, so I place my limit order to sell. There’s nothing else to think about here because the price environment is clear and clean. All that matters is the risk:reward, because the setup fits my plan.
The order is filled and shortly after that a long signal appears. I place a limit order to exit my short position near break even and my focus shifts to a precision entry to the long side if the price action sets up properly. Price doesn’t pull back quite enough to lift my bid to close the trade, and my stop loss is triggered without an in-plan opportunity for me to position long.
As soon the trade is over, I’m clear and focused for the next setup.
After stopping me out, price had run nearly to the pre-market high, but failed to test and break. I watch for an opportunity to get long for a second run at that level. The 1-min chart sets up an opportunity. There’s enough airspace from the entry price to the test of the high that I have “breathing room” to scratch the trade if the breakout fails to materialize. An acceptable stop loss is workable as well, so I place a buy stop to go long.
The order never triggers; instead, price quickly drops, and in the process signals a potential short trade. I quickly calculate the risk:reward based on my acceptable entry price, just as I did on the first trade. Everything fits my plan criteria and I place my limit order to sell short. Price just continues to drop without me on board. I have the momentary thought, “I should’ve just taken a first entry” but I know that’s only a hindsight thought. There was absolutely no reason whatsoever for me to have taken a first entry.
I watch patiently for the next setup that fits my plan. There are a couple potential setups, but the risk:reward for those particular entry levels doesn’t fit my plan. Suddenly, a 1-min bar sets up an entry with an acceptable cost and the chance for a minimum profit that’s twice the risk. I place my order and achieve the profit target rather quickly.
The key things here are focus on my trading plan criteria before anything else, the careful weighing of risk:reward based on technically reasonable price excursions, the ability to clear the slate after a losing trade, and the ability to shift from one directional bias to the other very quickly when the price action indicates it’s time to do so.
Recording yourself talking about these kinds of things while you trade could be quite helpful in keeping yourself on target throughout your trading session.
Really great post as you walk the talk. Very difficult to wipe the slate clean after a loss or even after a (win) positive trade but I can really see how important keeping focus is and the "etch-a-sketch" analogy in your other post. As you know I still hesitate too often on my set-ups only to see most would work, but when you mentioned about looking at risk first to see if it fits in your plan and also that it makes sense on the chart. Reading your post one can see you were in the flow and accepting what the market was telling you and following your plan. Thank you
I wanted to go over the 2 trades I took today and mention what else I saw and if you have any thoughts on how I might improve.
I sent 2 charts of the 1 min and 1 chart of the 5 min. I plotted the opening price and watched price mostly hold early. Then the breakout on the 5 min bar #5 to the upside through the o/n high. That bar seemed to happen in a flash (to me anyway) and not like a normal spike but rather as if there were a few orders up higher and wham,,,,it went from point A to point B. I was looking for an entry on the 1 min but never saw one. 1 min bars 35 and 36 touched 95.35 and held,,,,then it sloped down and I put a sell stop at 95.34. Filled on bar 42. Risk above candle 41 because it could go 1 tick and reverse. The target was 10 ticks with the 20 ema below about 20 ticks away and the opening price below that. I covered on bar 49. I will not hold or trade 10 minutes before the report,,,Period. My plan calls for shorts below the 5 min 20 ema and 1 min ema,,,broke that one rule and broke the same rule on next trade also. Bar 22 on the 5 min chart high 94.10. I entered on 1 min bar 114 long with 20 tick target and was filled and now up 30 ticks on the day and feel lousy. I thought traders were trapped on the 1 min chart in bar 111,,, bar 113 low would be a stop out if it didnt break. Why do I feel lousy?,,,Went long below the 5 and 1 min ema's. I am not at a point to do that yet because I am looking for consistant days trading my plan and targets for the day. If I had more patience there were 2 of my set-ups later,,,,(which I did not take),,, Bar 36 on the 5 min (into upper TL),,with entry on 1 min bar 181. 5 min bar 37 entry on 1 min bar 186. Breakouts to the ema with enough room work if context is there but its not in my plan. I like the 5 min ema for direction NOW and completely went opposite it. Do you think this should be a hard and fast rule?
I think I saw a 1-2-3 pattern there on the 1 min ,,,not pretty and did not trade it but would you agree? Also,,,,bar 38 on the 5 min,,,,I watched that do what we talked about but it gave the entry first then fell in the 5 min bar 39 to 95.13 then ran up like a champ. I will keep an eye on that set-up also as with the 1-2-3 and perhaps add that to the tool belt over time. Sorry its so long but I wanted to talk about what I see and why I did what I did. Thanks again. Blue lines on both charts are 5 min 20 ema and red line is 1 min 20 ema.
Tom, if you want to add to your trading plan, do the research and if the stats are favorable, set up your rules. You seem to have a professional approach to the counter-trend trades, weighing the risk:reward potential, making sure everything’s contained in a way that allows you to accept a losing result without scaring the dog too badly.
As a scalper, I trade counter-trend setups fairly often when the sun, moon and stars are all in alignment for the trade. I was long at 9:51am (your time) for several reasons, not the least of which was the “trap” potential based on the 1min price action following the break of the 5-min bar high.
Regarding bar 38 on the 5-min chart: That setup is all about the context. Notice how price came quite close to testing the 95.55 high, but not quite. It’s like having an itchy spot on your back that you can almost reach but not quite. Chances are the market will go get a back scratcher and try to at least reach that itchy spot (the previous high).
