Intraday Trading Plan

This is my trading plan for intraday trading of stock index futures. Note that some of the points will not be applicable to intraday trading of other instruments such as stocks or forex. For example, in terms of position sizing, a common way is to size it based on the distance between the entry price and the stop, however that is more useful when the units of the instrument are more divisible, unlike in futures each single contract can be very significant, especially for smaller accounts.

These posts are essential reading:

  1. Intraday Trend Trading Maxims (a.k.a. The Art of Train Catching)
  2. Irrational Trade Actions and Psychological Pitfalls in Trading
  3. Your First Mistake is the One That (Indirectly) Kills You (a.k.a. How to Blow Up)
  4. Gelling Situational Awareness and Price Action (a.k.a Don’t Fight the Price Action)
  5. The Nature of Willpower and Its Application to Trading
  6. Trading Discipline and Prada Knockoffs: The Slippery Slope of Bending Rules
  7. Trailing a Tight Stop vs. a Swing Stop: Which is Better?

The first post contains the essence of the trading plan. The second post contains the detailed psychological underpinnings of bad trade decisions and how to avoid them.

Trade Setups

  • Trend moves
    • 1st retracement upon trend change
    • 2nd and 3rd retracements during trend continuation
    • 1st retracement after breakout from a consolidation range
    • Time entry with stoch and momentum. Wait for momentum to be fully formed.
    • Trail stops with swing points.
  • Trend breakouts / breakdowns
    • This is a fail safe mechanism to get us into a very strong trend in case we did not manage to hop on the trend via a trend retracement. If the trend is not strong, it is normal for price to go back into the previous box so this trade would fail. As such, this should not be used with any ol’ breakouts / breakdowns, but only when the price moves so strongly that it either doesn’t have a deep enough retracement to enter, or the rebound from the bottom of a retracement (for uptrend) happens so quick that you can’t get in with a good stop.
    • When uptrend, enter long on a breakout of a swing high. When downtrend, enter short on a breakdown of a swing low.
    • For longs, place stop 1 tick below the breakout bar. If the breakout bar is still forming, and the low of the bar prior to the breakout bar is lower than the low of the breakout bar, place stop at the low of bar prior to the breakout bar. If the low of the bar prior to the breakout bar is the same as the low of the breakout bar, then place stop 1 tick below that low.
    • For shorts, place stop 1 tick above the breakout bar. If the breakdown bar is still forming, and the high of the bar prior to the breakout bar is higher than the high of the breakout bar, place stop at the high of bar prior to the breakout bar. If the high of the bar prior to the breakout bar is the same as the high of the breakout bar, then place stop 1 tick above that high.
  • Fade consolidation ranges in the direction of the trend entering into the range
    • For extended trend days, it is common for a good trend (with a couple of retracements) to consolidate in a range, before pushing off again like a fresh trend. To be onboard such trends, we must fade the consolidation range in the direction of the trend.
    • Place stop just outside of the range.
  • Flip moves on failed trade / Breakouts / Breakdowns
    • Scenario: L, H, HL, LH. Price from HL to LH is very close by (e.g. 4 ticks).
    • When price breaks the HL, flip from long to short. Reverse this for downtrends.
    • Initial stop is 1 tick above the breakdown bar (same as for trend breakout / breakdown trades).
  • Momentum exhaustion (countertrend)
    • Enter on exhaustion of strong momentum after an extended move.
    • You need to make a distinction between strong momentum, i.e. fast moves (think short covering), vs. a real push to a desired level by big players. Momentum exhaustion trade is best employed for those fast capitulation-type moves, rather than a real push to new highs / lows, because those real pushes tend to lead to a day ending at its highs / lows rather than retreating back.
    • This is a countertrend trade. you have to enter within 1-3 ticks from the extreme price (preferably 1-2 ticks). If there is no follow-through in the reversal of the strong momentum move, get out immediately!
    • Place a stop 1 tick beyond the extreme price.

Trade Entry

  • PLACE YOUR STOP FIRST BEFORE YOU ENTER YOUR POSITION!!!!!!!!!!!!
    • There are so many ways to screw up
      • You didn’t even think of placing a stop. That might happen when you are tired, feeling unwell, or just drained of your willpower after a day of trading.
      • You start looking for a stop after you enter and find that it is so far away, then you panic as the market moves against you and you get out at a loss even when your stop is not hit and the market eventually goes your way.
      • You start looking for a stop after you enter, you find that it is so far away, you realized that you have made a huge mistake, then you scramble to get out, at breakeven if you are lucky, at a loss if you are not.
      • You don’t place a stop even though you have a mental stop, because you think (or the market has just made you experience a situation that made you think) that the your side is strong enough to reject moves from the opposing side. To do this effectively (read the Stop Placement section below), you really need to be in peak form. It is so so so easy to have the price blast through your mental stop, and for hope to grip you tight and prevent you taking appropriate action. By using a ‘mental stop’, you would effectively be placing yourself in a situation where you need your willpower to bail you out. Not good. This is extremely risky and should be done when you know that you are in peak form.
    • Placing your stop first will force you to consider the distance between your entry price and your stop. That will help to modify your behavior so that your entry points are closer to your stops, leading to a better risk-reward trade.
  • Enter close to your stop. If you don’t get a good risk-reward entry, don’t take the trade.
    • Your sense of security is governed by your stop size. The closer you are to the stop, the better your risk/reward ratio.
    • The further you are away from your stop, the less psychological capital you start with to withstand the natural fluctuations. And when the price goes against you, the greater the psychological stress you have to endure, and the bigger the monetary loss if you are wrong.
    • Go for cheap bets, where you only need to spend a tick or two to find out whether you are right.
  • It is better to try to catch the turning point to have a lower risk
    • You need to pay close attention to the action in order to catch the exact turning point for trend retracement entry. If you combine both price action and DOM action, you could get a risk of 2-3 ticks.
    • If however you wait until the swing point is clearly identified and price starts to move away, you typically end up with 4-6 ticks of risk. Worse still, the probability of fighting happening around your entry price is much higher.
    • So it is far better to be in a position of 2-3 tick risk, with fighting happening at a level where you are in a 2 tick profit, rather than being in a position with 4-6 tick risk and fighting happening when you are in a 2 tick loss.
  • Use anticipatory entries for pullbacks to prior support / resistance levels or during choppy markets
    • When there are nearby levels, those are known and can be used. This will also help to lower the risk so as to have a better risk/reward.
    • During choppy markets, confirmations count for nothing. Use the chop to get a good risk/reward.
  • Use confirmatory entries for retracements
    • When you don’t know where or when the turn will be, use confirmatory entries. You know the other side has started to defend when the high of a previous bar is broken (for uptrend pullback) or when the low of a previous bar is broken (for downtrend retracement).
  • Trend retracement entries need both MA slope and crossover
    • In addition to price action confirmation, (i) the trend MA must slope in the direction of the trade, and (ii) price must be above the trend MA for long, below the trend MA for short.
  • Trend change entries need MA proximity
    • In addition to price action confirmation, trend change entries need to be near the trend MA so that it is likely that trend change would be confirmed by the trend MA.
    • It is fine for the slope and position of the trend MA to be counter to the trade direction.
  • Never take countertrend positions
    • Yes you might be able to make more dough at the point of trend exhaustion, but it is tough to catch, and the losses you get during your attempts would likely outweigh the gains you make from the successful attempts.
  • Don’t trade when the day is slow, with low volume in a tight consolidation range
    • First, read the separate section below on Why Range Trading is Fraught with Traps.
    • This is to prevent losing money to whipsaws. There will be heavy fighting between the two extremes of the consolidation range, and prices will rush from one extreme to the other extreme, that is very normal. It is very easy to get caught up in the momentum rushes from extreme-to-extreme, and enter because you think that they are like the momentum rushes you see during trends. They are not. In tight consolidation ranges, they are the rushes that brake and get stopped by a brick wall at the extreme.
    • You get whipsawed when you
      • Enter within the consolidation range, close to an extreme, anticipating a breakout because of the strong rush towards the extreme. That strong momentum rush is misleading, it is caused by people’s fear of losing out in the ‘fading the range’ game. And because people are playing that game, the resistance at the extremes will be strong, and the odds favor bouncing back into the range rather than a breakout.
      • Enter 1-2 ticks outside the consolidation range, anticipating a continuation of the breakout. The big players push the market to those levels to hunt stops. Odds still favor a return to the range.
      • Enter with an entry stop at a far enough distance away from an extreme. However it would likely pullback after it gets there, so you might as well wait for the pullback to re-test the breakout and enter there.
      • Place entry stop orders within the consolidation range, anticipating prices to return into the consolidation range. Yes you are playing the fade game, however, where do you place your stop? If you enter decently within the consolidation range to get assurance that price is coming back in, your stop will be too far away so your risk/reward will be poor. Your stop would necessarily have to be outside of the range because things are very choppy within the range, so any stop within the range would very likely be hit, even if price eventually goes to the other extreme.
      • Place entry stop orders at the extreme of the consolidation range, anticipating prices to return into the consolidation range (fade trade). If you place your stop 2 ticks away, there is a decent chance of your stop being hunted. If you place your stop 4 ticks away, it is better, but you take on additional risk. Compare such a trade with a trend trade where you risk 2-3 ticks and the reward is 2-3 times your risk. With a 4 tick stop here, how likely are you going to get a 12 tick reward? If from extreme-to-extreme, your consolidation range is only 12 ticks, with the many swing levels within the typical consolidation range, the reward is tough to get at compared to a trend trade.
    • Look at the distances between the swing lows and swing highs. Too close is not good.
    • Look at the volume. Too little is not good.
    • There is no good reason to play this scenario. Remember, avoiding the losing trades is more beneficial to the P/L than taking profitable trades. In fact, you should avoid losing trades even at the expense of missing profitable trades. The significant risk in playing consolidation ranges do not justify the potential reward.
    • There is also the psychological aspect of playing a range, watching the DOM thinking whether is it going to break out? get reversed? the added uncertainty creates added uneasiness, as compared to cleaner psychology when playing a trend trade.
    • You need to wait very patiently for a very clean break out of the whole consolidation range (from top to bottom, not just breaking of swing lows or swing highs within the consolidation range) before you look to take action, preferably on a pullback entry. Watch for the moving averages to widen, as a sign that it is not going back in.
    • Finally, if after all that you STILL want to play a fade, make sure you don’t use a momentum stop, because the action within the consolidation range is typically choppy. Instead, once the trade becomes profitable and price has moved away some, move stop to  breakeven or a few ticks profit, and keep it there to gun for the price going to the other extreme.
  • One exception to not trading ranges is if there is a decent trend prior to the range
    • Sometimes you have trend days with multiple levels of consolidation ranges as the price moves towards its desired end. For example, price trends up, consolidates in a range, breaks out and moves up, consolidates in another range, breaks out and moves up, consolidates in another range, breaks out and moves up, etc. (e.g. Nikkei on July 30, 2013).
    • If you don’t take any trades when the price ranges, you might miss a large chunk of a very nice trending market because you can’t find any proper entry. At the breakout points, your trend stop will be too far away, and there are no nice retracements for you to enter because of the strength of the moves.
    • To get in on such trends, you have to enter a fade trade (w.r.t. the range), in the direction of the day’s trend.
  • Don’t trade when the trend is not absolutely clear!
    • The trend needs to be clear to all professional players, then you have a good probability trade.
    • If the trend is not clear, don’t enter. This is especially so at the start of the trading day.
  • Obey support / resistance and major levels (e.g. VWAP, day high, day low, prior day close)
    • Don’t long just below a resistance, don’t short just above a support (unless like 3rd attempt).
    • Calculate the risk/reward, if it is below 2, you are too close, don’t take it. 2 and above, take it.
    • If you are long and at a previously strong resistance, watch for signs of reversal, exit immediately if seen. This should be done via a tightened stop, i.e. a momentum stop.
    • If you are short and at a previously strong support, watch for signs of reversal, exit immediately if seen. This should be done via a tightened stop, i.e. a momentum stop.
  • Note that a trend change shows up in price action first before the 50 SMA angle changes.
    • This means that for the 1st retracement after a trend change, that is typically entered counter to what the 50 SMA angle suggests. To reduce the risk, make sure that the 50 SMA is near by so that a change in its angle is very plausible.
  • Place entry limit orders appropriately
    • If the market has a decent amount of tussle between bulls and bears, i.e. multiple long bars with overlapping ranges, then you might gun for a better price away from the bid-ask, close to your stop. This was the situation seen in the ES in the June 2013 correction.
    • Else, all entries should be taken at the bid-ask using WAT orders. Don’t try to get a better price away from the bid-ask and risk letting the trade pass by because your reluctance to pay up.

Stop Placement

  • Always place your stops at the logical position based on price action
    • Many times when you enter a position far away from a trend stop, you would put a tight momentum stop to give you a false sense of security. But what happens will be that your momentum stop will be hit, and you will re-enter the trade, get your momentum stop hit again, and the third time you don’t enter, price zooms off. And all this while, a proper trend stop would never have been hit.
    • Stops must be placed at their logical points, even if far away.
    • If it far better to take a low probability risk of taking a large-size hit with a trend stop, than to take high probability risks of taking multiple small-to-medium-size hits with momentum stops and multiple re-entries.
  • Trend trades
    • Trail stops using swing points.
    • Never place momentum stops for price movements that do not have momentum.
  • Momentum trades
    • Use momentum stops (e.g. for longs, 2 ticks below the highest low of completed bars).
  • Place your stops immediately after entry.
    • You don’t want to be hammered by a connection break while the market runs off.
  • NEVER EVER RELAX OR REMOVE YOUR STOP
    • You might think you want to exit at a better price but more often than not it blows through your stop and you end up chasing price, eventually exiting at a huge loss.
    • If you couldn’t resist the temptation, and you took out your stop as the price approached, remember this: get out immediately once your original stop price becomes unattainable (i.e. you are trying to sell to exit a long and your original stop has become the Ask, or you are trying to buy to cover and your original stop has become the Bid)
  • Trend stops are better than momentum stops. Hence only use momentum stops when they are unavoidable (e.g. trend stops are just too far away). Momentum stops are a lesser evil compared to having no stops at all.
    • Momentum moves may happen during a trend, but not all momentum moves are trend moves, and not all trend moves are momentum moves. Hence the safest stop placement when you are playing to catch a trend is still a trend stop, not a momentum stop.
    • Because if you enter based on momentum and placed a momentum stop, you can get stopped out of the momentum move but the trend still works out correctly.
    • If the trend appears to resume, usually at a price even further away, you would then be stuck in a situation where if you re-entered, you would be far away from a trend stop, and a momentum stop is not appropriate because you just broke out of momentum and the move may not even be a momentum move.
    • So using momentum stop can land you in a bad situation even if the trend works out fine.
    • Momentum stop works only if you are lucky that the momentum is strong enough to push it away even if the trend stop is far away. Hence it should only be used when you see a strong breakaway shooting off, not when it is a just a normal strong move within trend movements.
    • In conclusion, try NOT to use momentum stops. They are bad. Even though they may appear to be a very convenient tool, it gives a false sense of security especially when they are used on non-momentum moves. Only use momentum stops with momentum moves. Using momentum stops with non-momentum moves is not logical.

Trade Management

  • Only exit when stopped at the point where trend reverses.
    • When you sell because you think that it has gone far enough, or the opposing forces are becoming stronger, you are essentially predicting the short-term movement of the price. Nobody can do that successfully. Let the fighting take place and resolve itself.
  • Ignore the immediate momentum, only the structure matters. The
    • Immediate momentum can be clearly down but it is just a temporary rock, it cannot alter the structure / shape of the stream.
    • Let the stream flow its natural course, there will be rocks along the way that attempt to impede the flow, but the flow will continue.
  • If you get stopped out when your stop is at a logical spot and price quickly went back to your entry price, re-enter immediately
    • The re-entry does not require your fresh entry criteria to be satisfied.
    • This is for the situation where there is a shake out that is quickly repelled.
    • The stop for the re-entry would be your original stop. In the case of a long, the first violation of your stop made a lower low. After you re-enter, if price hits your original stop again, it would have meant that price went up, made a lower high, came back down and hit your stop. So you would have a lower low and a lower high — a trend reversal, so you should not be holding your long position. Reverse for a short. By right it would also mean that after you re-entered, and you see a lower high forming, it is also time to get out of the position even before the initial stop gets hit.
  • If you get stopped out when your stop is at a breakeven level, you re-enter immediately if the logical spot level holds
    • In this case the re-entry price need not be the same price as the stopped out price, since the stopped out price was at the same level as the previous entry. Just apply the usual entry rules.
  • Re-enter immediately if you get shaken out (i.e. you manually exited your position because you fear the position going against you) by immediate momentum
    • If you are shaken out by immediate momentum, you have just made a trading mistake. Get back in immediately.
  • Support and resistance still needs to be obeyed (including major levels such as VWAP, day high, day low, prior day close). If a level is acting as it should, follow it.
    • E.g. if trend is down, you get to an area near a support level, tighten your stop to a momentum stop. Once your stop gets hit, place a re-entry stop order at the spot where it shows your countertrend exit is wrong.
    • A support is not a reason for going long in a downtrend. In a downtrend, a support means you should get flat, and wait for the support to be broken to get back in.
    • A resistance is not a reason for going short in an uptrend. In an uptrend, a resistance means you should get flat, and wait for the resistance to be broken to get back in.
  • If you end up getting out too early, stop chasing, wait for the pullback, be satisfied with the bit that you got because it is too risky to chase further.

Risk Management

  • Daily soft stop
    • Once you hit a loss of $400 per contract, you must halve your standard trade size.
    • E.g. if you usually trade 1-2 contracts, you can only trade 1 contract. If you usually trade 2-3 contracts, you can only trade 1-2 contracts, etc.
  • Daily hard stop
    • Have a daily stop of $500 per contract.
  • Daily trailing stop
    • Once your P/L for the day per contract reaches $500, set a 50% retracement daily trailing stop on the P/L.
  • Handling doubts
    • When you are unsure about a trade, just don’t take it. There will be other opportunities. Wait until the situation becomes clearer.
    • When you have doubts arising on aspects of your trading plan / system (e.g. due to the market behaving differently), either (1) stop trading for the day and figure it out, or better yet, (2) continue plowing through using your existing trading plan for that session. The experience will give you valuable feedback on whether aspects of the trading plan needs changing or you are just experiencing a rough patch of losers.
    • You MUST pick one or the other, i.e. stop or continue per your original plan. If you continue while unsure and hesitating, that uncertainty and hesitation will kill you.
  • Coming back from a long break
    • If you just came back from a long break or holiday, do not start trading as usual immediately. Take the first day slow, you need to ease your mind back into it. If you don’t let your mind ease into it, and simply start trading with a ‘fresh’ mind, you may find yourself making a lot of fresh rookie mistakes.
    • Trade the first day on SIM, or just watch the market and think of what you’ll do and see the results of your hypothetical trades. You NEED the easing in. If you take live trades, it is HIGHLY LIKELY that you will react with your fresh rookie impulses.
    • In addition, go through and re-internalize all your common mistakes, visualize yourself being faced with the situations that tempts you to make those common mistakes, and see yourself overcoming them by taking the right actions.
  • Guidelines on setting daily stop (from SMB)
    • Daily loss limit set at one half the median profitable trading days. Increase a trader’s risk 20 percent for every 10 positive days of trading.
    • Daily stop loss should allows you to take at least 8-10 consecutive losses in one day. If your current system/stop loss combination does not allow you to do this then you have to consider lowering your tier size

Trade Sizing

  • Risk should not exceed 0.25% of capital.
  • For more aggressive play, pyramid at the 2nd retracement. No more pyramiding allowed after that.
  • Another place to pyramid is when the market gives you a superb risk-reward situation close to your stop.

Trade Execution

  • Move your existing orders, don’t input new orders and keep multiple orders open
    • This is to prevent mistakes where previous orders get executed and you end up being in a position you did not intend.
    • Worse still, you may end up with a countertrend position, and generate hope, the worst possible combination.
  • Exit immediately on mistakes in order entry
    • Don’t ever look at the market and hope that your misplaced trade makes a profit. Hope kills.

Trade Psychology

  • Focus on the NOW, don’t be caught up with regret over what you should or could have done with things past.
  • Do not revenge trade, e.g. keep putting on the same trend reversal trade which keeps failing. Once you catch yourself thinking that you need to make back the losses that you just incurred, stop yourself. Take a break, and even consider stopping trading for the day if you are not able reset your mental state.
  • Cultivate self-awareness of emotions, positively reframe your thoughts
  • Read a motivational piece, think of what you are grateful for
  • Smile, adjust your posture straight, stand, deep breathing, 5 secs in, 10 secs out.
  • If you look at life as something to be enjoyed, you take everything as it comes, then that’s the way your trading’s going to be. It’s going to be enjoyable, it’s going to be relaxing.

Be Aware and Look Out For Your Most Common Trading Mistakes

  • Chasing with no proper stop
    • Entering in the direction of the immediate momentum, far away from a proper stop. Usually at a point where the price is ready to reverse.
  • Going countertrend
    • Good gains some times,  but overall more losses than gains.
  • Missing entries
    • Once your entry signal triggers, enter immediately if price is within 4 ticks from stop. Don’t wait for a better price and let price run away from you.
  • Entering based on other time frames
    • If you trade the 1-min chart, apply your rules to the 1-min chart, not other timeframe charts (e.g. volume, 3-min).
    • You are prone to taking trades using 100V chart with stops at insignificant points, and second guessing your entries because it is bad on the 1-min chart but still good on the 3-min chart.
  • Caught in a range / trading range breakouts
    • Entering trades when the trend is not clear, or getting caught up in the momentum within the range thinking that it would lead to a breakout, then getting whipsawed in a range.
    • If there is a large directional movement before the consolidation, you must fade the range, in the direction of the prior trend.
  • Revenge trading
    • Keep taking the same type of trades, wanting to make back your losses in the same way. Probably subconsciously wanting to validate the previous trades that failed.
  • Overtrading
    • Increasing size when trading badly, in an attempt to recover the losses.
  • Averaging down
    • Only scale in when risk/reward is very favorable.
    • Never add in order to average down the entry price.
  • Not paying attention to look for next entry point
    • After you exited from a trade, you tend to take a break, instead of watching for the end of the retracement for another entry.
    • After you get stopped out from a trailing stop, focus your attention to look for signals to re-enter.
  • Expectation of a range bound market when it should be a trend
    • When two very strong forces throw the kitchen sink at one another at a price level, usually one pukes, and a trend develops, instead of a range bound market developing.

Techniques to Identify Swing Points / Pullbacks Before They Form

  • Use a fixed number of ticks and width
    • E.g. pullbacks must be at least 7 ticks in height and 5 bars in width
  • Use an oscillator
    • E.g. 5-period RSI, or a slow stochastic
  • Use channels
    • E.g. when price goes below the middle line of a 14-period Donchian Channel for an uptrend
  • Look at Fibonacci retracements
    • E.g. 50% retracements

Why Range Trading is Fraught With Traps

  • Range trading requires a different mindset, or a different set of interpretation rules, compared to trend trading.
    • Scenario: Within the range, very strong momentum buying or selling pushing towards one extreme, bids or asks successively being taken out by huge volume
      • Trend follower: Enter in the direction of the momentum
      • Range trader: Fade the move, enter in the opposite direction.
    • Scenario: Within the range, you see breakouts of swing highs, higher highs, higher lows, you see that once, and you see another higher high and another higher low
      • Trend follower: Enter in the direction of the “trend”
      • Range trader: Prepare to short the move when price reaches the high extreme of the range.
    • Basically, the same price action occurring within a range, needs to be interpreted in the opposite way compared to the same price action occurring outside of a range. If you are a long-time trend follower, it is very easier to get caught up and immediately apply your trend following interpretation and take the wrong actions.
  • The best way to trade a range might be to just think of price movements within the range as being covered up / grayed out. Price can move very choppily and unpredictably within a range boundaries. So one should NOT pay any heed to the price action within the range. In fact, many times, the price action within the range is engineered to entice you to trade in a certain way and whipsaw you around.
  • The previous point is important enough to be repeated: IGNORE THE PRICE ACTION WITHIN A RANGE!!!
  • There are two proper ways to play a range
    • The Better Way:  Wait very patiently for a very clean break out of the whole consolidation range (from top to bottom, not just breaking of swing lows or swing highs within the consolidation range) before you look to take action, preferably on a pullback entry. Watch for the moving averages to widen (which also shows that the breakout is decent enough), as a sign that it is not going back in.
    • The Lousier Way: Place entry stop orders at the extreme of the consolidation range, anticipating prices to return into the consolidation range (fade trade). It is much much better to enter a fade trade in the direction of the day’s action. E.g. if the day so far is in a downtrend, price is below the VWAP, look to enter your fade trade on the short side, rather than on the long side. This increases the probability of your fade trade. Note that there is also the phenomenon of the last puke of the day, so definitely do not want to be on the wrong side of that by entering a fade trade that is not in line with the day’s trend.
  • Risk/Reward considerations
    • If you decide to play the range in the lousier way, your risk/reward would likely be worse than a normal trend trade.
    • If you place your stop 2 ticks away, there is a decent chance of your stop being hunted. If you place your stop 4 ticks away, it is better, but you take on additional risk. Compare such a trade with a trend trade where you risk 2-3 ticks and the reward is 2-3 times your risk. With a 4 tick stop here, how likely are you going to get a 12 tick reward? If from extreme-to-extreme, your consolidation range is only 12 ticks, with the many swing levels within the typical consolidation range, the reward is tough to get at compared to a trend trade
  • When to exit
    • In a trend trade, the exit is pretty clear, i.e. at a point where the winning side is unable to defend its previously won fortifications.
    • In a range trade, when you fade at an extreme, where would you exit? Some people exit at 1R, some people exit at when the other extreme of a bollinger band or a donchian channel is hit. Essentially that translates to a level around a previous swing low (if you shorted) or a previous swing high (if you went long). All these approaches are fine. However the further away the target, the lower the win rate. So it really is up to your own temperament on this.

Why You Should Never Get Off The Train Via Active Orders Other Than Stops

Firstly, the action of exiting your position via active orders is on the basis of making accurate predictions on the immediate short-term movement of the price. When you sell because you think that it has gone far enough, or the opposing forces are becoming stronger, you are essentially predicting the short-term movement of the price and acting based on that prediction. Nobody can do that successfully. You have to let the fighting take place and resolve itself.

Secondly, it is very difficult to get back in after you jump off the train.

  1. If you just jumped off and the train carries on going in the direction of the trend, you have this natural inertia to get back on, because
    • You have just got off, so it doesn’t gel internally to get back on again immediately. You will be doubting yourself, thinking why you would get in at the same price when you just got out;
    • Most likely you would need to get in at a slightly worse off price compared to the price you just sold, so you don’t like that and will wait to get a better price hence resulting in you missing the boat all together. This is extremely difficult to overcome; and
    • Worse still, you might just be stuck in indecision, thinking whether you should get back on board or not, and eventually do an impulse action because you feel the time pressure to make a decision as the market is moving, so to get rid of that knot you rashly decide on an action.
  2. You might end up chasing after price, far away from a logical stop. Without a proper anchor, you become a prime target for the DOM to shake you out.
  3. In fact, when you exit early, there are a number of scenarios shown below. There are just so many ways to lose, and only 1 way to win. There is simply no reason to take this masochistic path. For example, you exit a long trade:
    • Price goes down, you get back on at a lower price = you win
    • Price goes down, you psychologically cannot get back on = you lose
    • Price goes down, you enter countertrend = you lose
    • Price goes up, you chase, price goes up =  you lose the amount from exit to re-entry
    • Price goes up, you chase, price goes down = you lose your base capital
    • Price goes up, you psychologically cannot chase = you lose (potentially)
  4. Your entry price to get back on the train might be too far off from your stop, so it is more risky and if it exceeds the threshold in your trading plan, you can’t take the trade.
  5. You have to be contrarian, when there is a sudden vertical drop move towards your support level, but does not exceed your support, you have to buy when your instincts tell you to sell. The logical action is to buy because you have a good risk-reward, but your natural tendency is to extrapolate the down move to urge you to sell.
  6. It gives you more chances to question your entry, for example, even if you have higher lows, you might see a lower high and say hmm maybe the uptrend is going to end, and when price breaks out, invalidating your caution, you might say that price is too far away from the support to take the trade.
  7. Getting off the train also exposes you to the temptation of going countertrend, just to get back into a trade. You know that you would be entering far away from a proper anchor if you are entering with the trend, so to ‘get a trade’, your mind conjures up reasons why it is good to go countertrend, why the run has gone far enough and is time to turn around. Countertrend trades can bleed you dry, few drops at a time. And remember, bad decisions compound.

Basically getting off the train brings with it so much issues in terms of getting back on: (i) internal dissonance with recent sell action taken, (ii) creation of a price reference point to judge current price, which is illogical, (iii) could result in situations where your trading plan does not allow you to enter, (iv) need to reverse your natural tendency to extrapolate recent price action, and (v) introduces an avenue to question your re-entry.

-END-

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