SETUP and EXECUTION

SETUPS AND EXECUTION

The 2 Setups for Getting On-board Trends Early

• There are two basic ways to enter a trend day early in the session. Our goal with these setups is not just to get on board the trend, but to get on board of it as early as possible to maximize the profit potential.

• Setup #1: Enter on an open-drive. If open-drive behavior is a good tell that a trend day may be in the making (given conducive conditions), then it makes sense that the open drive would act as a setup to get you on board of the trend very early on.

• In terms of actually entering on Setup #1, with experience you’ll gain a feel for when an opendrive is happening, and once you feel like you’re in the midst of one, the way to enter is simply to jump on board the momentum with a market order. The name of the game now is getting on board, and that should be your main goal. This requires a certain mental shift from what you’re used to with fade setups, as now you will be going with the momentum and jumping on board in the midst of directional movement, as opposed to waiting to fade at a zone.

• The mental shift is extremely important and necessary and you should prepare yourself and rehearse it mentally whenever the conditions for trend are present and you know you may see a trend day. You do not want to be trying to fine-tune your entries with limit orders when you’re seeing an open-drive. Just get on board or you’ll likely be left in the dust and miss a large trade. Having flexibility of mind is a key skill you need to develop to be a good trader.

• We had explained before that we do not wait for confirmation to enter a trade. It may seem like we’re now contradicting ourselves as we’re enter after price has made a decent directional move. But the reality is that this is a completely different context since the directional move itself is the setup. Without the directional move, you have no open-drive and therefore no setup. Whereas when you’re fading a zone, you have the setup before the confirmation. So clearly, these are different things, and waiting for confirmation in this context would be to see the open-drive but then wait for the trend to develop and confirm itself before entering. That’s what you must avoid doing.

• In terms of stop placement with an open-drive, you don’t need to place your stop below or above the extreme of the move. You will be used to placing your stop beyond a certain zone when trading the fade setups, but now you’ll also need to make a quick mental shift and be able to use a volatility stop. This is a stop that gets you far enough away from normal rotations and market noise such that if it’s hit it means that a more significant move against your direction is taking place. When using it with an open-drive, simply make it wide enough that it would only be hit if most of the open-drive move is retraced. This would mean that the opendrive is invalidated since there is no longer pure one-way conviction, which is the very definition of an open-drive.

• As a general principle, remember that regardless of the setup, you should be putting your stop at a point where your trade idea or hypothesis would be invalidated. That may or may not be beyond a certain extreme. It just has to be at a point where your reason for entering the trade has been invalidated.

• If you weren’t able to enter on the first thrust of the open-drive, the other way to enter on this setup would be to get in on the first pullback. Here it’s important not to wait for a deep pullback because the directional conviction will basically ensure that any pullback you get will be shallow. So use that as your hypothesis and enter on the first small pullback. And even here, don’t mess around with limit orders or try to finesse the entry. The name of the game is still getting on board the trend early. • To become better at detecting open-drives it is very useful to study historical charts of your market. When you’re doing this, the open-drive won’t look significant when you’re looking at the trend day in its entirety. So it’s best to scroll your chart and look at it as it would have looked to you in real time. Reviewing historical charts in this manner will accelerate your ability to pick up on these setups in real-time.

• Setup #2: Enter on a breakout from an early balance area. Since most trend days start either with an open-drive or a breakout from balance, it makes sense that this would be the second setup for getting on board trends early.

• In terms of entering on setup #2, you want to wait for a strong breakout out of balance to enter. This, again, is NOT waiting for confirmation, because the very setup itself is a breakout from balance. If you don’t get a breakout, or you just get weak drifting action that slowly expands the balance without breaking out with conviction, then the setup doesn’t exist.

• There are advanced ways to enter before the actual breakout occurs, but this depends on keen contextual understanding and an ability to read such things as the market internals, or other related markets quite well. If certain tells are present that an eventual breakout will ensue in a certain direction, then you can enter while still within the balance, knowing that breakout moves often start from the high volume nodes of balance areas. But absent such information (which is the case many times), you’ll want to enter on a strong breakout from balance.

• When you do enter on a strong breakout, the name of the game here is also just getting on board. So you want to enter at market with the initial thrust out of balance before it has moved too far. Yes, you may be able to get better trade location by waiting for a pullback, but often you want have a pullback until price has moved a huge amount. And since these trend trades can be so profitable due to the persistent directional movement, your main goal is to get on board and not to try to fine-tune the best entry.

• In terms of stop placement on this setup, it’s more of a tricky one. On the one hand, what would truly invalidate a breakout out of balance is if price came back and broke through the high volume node of the balance. On the other hand, in most instances under the right context, price will never come back into the balance area. So where do you put your stop? There’s no right answer here, but our preference is to use the tighter stop that’s just inside of the balance area, and then if you’re stopped out quickly re-enter there with a stop beyond the high volume node. We prefer this method over that of putting an initial wide “safe” stop, because most of the time the market will just take off and by using the large stop you are getting a much worse reward-to-risk trade. Yes it will save you a loss at times, but overall your results will be much better if you use the tighter stops with the much larger reward-to-risk. They will more than make up for the occasional loss which forces you to re-enter.

• As a final note, of course there are times that a trend day will form without either of these two setups occurring. In such a case, unless you happened to enter with a fade of a zone and were already on board as the move morphed into a trend, you simply would not have a way of getting on board early on before the trend confirms. This is okay as you simply need to focus on those times that the market is giving you a clear opportunity to get on board. Remember that nothing is 100% in trading.

The 3 Fade Setups

• A setup is simply a combination of elements that come together to create the right conditions for a trade. • The first and main ‘fade’ setup that we use is what we call the contextual alignment setup. This means that the bigger picture and / or intraday context are aligned with a support / resistance zone in such a way as to give good odds for a tradeable reaction at that zone. In reality, while we’re separating this into its own specific setup, you want to have contextual alignment in any trade you take. And this alignment will come from applying the 9 principles of effective intraday tactics that you learned in a previous session, along with everything else you’ve learned about reading the market.

• But for the purposes of giving more structure to your trading, we’ve labeled it as its own setup. This has the added benefit of allowing you to realize that when you have strong contextual alignment at a good zone (based on all the principles you’ve learned beforehand, along with all of your other market prep work), you can simply take the trade right there without waiting for any other confirming indicator or price behavior. The contextual alignment is the setup itself, and you can use what’s called a “direct lean” to enter on the setup. This just means that you put your order at the zone, and you ‘lean’ against the zone to enter the trade.

• In terms of where to enter at the zone, this is a personal decision. On the one hand if you enter at the front edge of the zone, you guarantee that you will get filled on your trade if the price reaches the zone, but your stop will have to be larger to be beyond the zone. On the other hand, you can enter in the middle of the zone to have a tighter stop loss (and resulting larger position size and better reward / risk ratio), but you will end up missing some trades that only reach the front edge of the zone. There’s no way around this dilemma- it’s just a part of trading. Personally, in our own trading, we prefer to usually get in on the front edge of the zone. We’ll definitely do that the more confidence we have in the zone under the given context. In this way, we’re sacrificing better reward-to-risk to make sure we don’t miss the trade altogether.

• When you’re trading this kind of setup, we don’t recommend trying to read the price action as it approaches the zone to decide if you should place your order at the front edge or in the middle. The reason for this is that you’ll often get a lot of back and forth action (i.e. chop) on the smallest timeframes at these zones, and there’ll be a large amount of randomness that you’re trying to read. You’ll often end up making incorrect decisions, and it will only complicate the process of trading and make it more stressful for you, without much corresponding benefit

• In terms of stop placement, realize that you shouldn’t have some sort of fixed stop size that you use (for example 2 points in the S&P). The reason for this is that market volatility is changing over time, and as we get volatility expansions, the zones are naturally going to get wider, and you’ll need larger stops. Conversely, as volatility contracts, the zones will get tighter and you’ll need smaller stops. So base your stops on the zones themselves instead of a fixed point amount, and this will naturally adjust for volatility for you.

• The better you get at reading the market context and determining the important zones, the more of these setups you will find, and the more good trades you’ll be able to take. So practice diligently, and review the Market Framework section with the drills to deepen your understanding and enhance your skills.

• As mentioned previously, even though contextual alignment was organized into its own separate setup, you really want to have context (based on a range of many different possible factors that combines everything you’ve learned so far) on your side in any setup. At the very least, you don’t want the context to be outright against you, which for example would be the case if we were trending heavily down in the big picture, and today we’re showing strong weakness with the bears in control, and we’ve just had a long balance intraday and are now breaking down into a support area. In this case you wouldn’t want to buy in that area because the context would be outright against a buy.

• Assuming context is not outright against a potential trade, and assuming that it’s also not so strongly with it (or the support / resistance is not very strong), then you would want to see either Setup 2: Exhaustion or Setup 3: Divergence to warrant a trade there. • It should go without saying that during the trading day, new support and resistance zones will be formed that can be used while you’re trading that day. When they line up well with context we can take trades there. And if there isn’t perfect contextual alignment but there is either setup #2 or #3, this can also provide the backdrop for good trades. • Exhaustion occurs when we have an extended move without much retracement that is now seeing volatility expansion (wide range bar) accompanied by a volume spike (and TICK spike if you’re trading the equity indices). Volume and volatility expansion are a good thing at the beginning of a move, but they are usually signs of exhaustion when the market has already made a large move in that direction. When this occurs at a support / resistance zone (either an intraday or a larger one) and the context is not outright against it, then we have setup #2. .

• In terms of trading an exhaustion setup, realize that by default, it’s going to seem very scary to fade the price action at that moment in time. For shorts, the market is going to seem very bullish. For longs, it’s going to seem very bearish. It’ll seem like it will surely continue. But unless it’s an outright trend day, or a very strong trending move on consistently large volume where one side is overwhelmingly in control and the context is confirming that, these will often be the best times to fade the price action. You can’t wait for confirmation. Simply think in probabilities and take the trade right then and there when you see the expansion and volume / TICK extreme at the zone.

• The Divergence setup occurs when price is making higher highs or lower lows but the market internals (or any other indicator that you may happen to use) are failing to make new highs or new lows. If you trade the equity indices, we recommend that you stick with A/D Line divergences. TICK divergences happen far too often to be very meaningful, and you’ll likely get into trouble trying to read them. The TICK is more useful to look for extremes and to gauge the general directional conviction of the day.

• The right way to trade a divergence setup is to take the trade right when it’s inside the support / resistance zone as you’re seeing the divergence. Again you do not wait for confirmation from price. If you want to be conservative, you can wait for a double divergence, which will happen when price makes another new high or low and yet the indicator you’re looking at makes yet another lower high or higher low. In this case you have a double divergence and the odds are greater for a reaction the other way.

• In either case, you have to condition your mind not to think in terms of what-ifs. You’ll naturally find yourself thinking “what if price keeps moving and then the A/D Line (or any other indicator) catches up and the divergence is erased?”. Yes that will happen at times, but you have think in terms of long-term odds and realize that it will only happen a minority of the times. Don’t think about trying to avoid the losses when the setup doesn’t work. You can’t avoid losses. They’re part of the game. Overall, you will have an edge in the setup, and if you just consistently take these trades as they’re occurring inside the zones you will come out ahead in the end.

• Make sure to not simply start looking for exhaustion and divergences everywhere. Many traders get excited about these concepts and start seeing them everywhere. They do happen very often, but they’re not trade setups with an edge unless they’re happening at a support / resistance zone without the context being outright against them. So make sure to limit your use of them to these instances even if you happen to see them working at other times (your mind will ignore all the times they fail because the divergence or exhaustion will no longer be visible in hindsight on the chart when price keeps moving in that direction).

• Sometime these two setups will occur in confluence with setup #1. Confluence is a principle we had discussed when we were talking about key reference areas, but it also applies to setups. The more setups that line up at one time, the higher the odds. If you have an important zone and the context is aligned with it such that you think you’ll have a good trade there, seeing a divergence or exhaustion there will give you more confidence to take the trade and to hold it to your profit target. This can often prove to be very powerful.

The 5 Techniques and 3 Rules of Effective Profit Exits

• Profit exits is likely the area that traders have the most trouble with. But other than position sizing and stop losses, this is the element that will have the largest impact on your bottom line.

• The proof of this is that the #1 most quoted trading rule is to cut your losses short and let your profits run.

• Letting your profits run starts with having enough profit potential in the trade to begin with. Many traders don’t even have this basic part right, as they get into trades that don’t have enough profit potential to be warranted. They’re trying to trade for ticks, thinking that this is a safe and highs odds way to trade. In reality, this will put you behind before you start the game. • But in order to let your profits run effectively, you must realize that in the world of day trading, you are highly restricted by time. This means that you must be skillful in gauging how much movement you’re likely to get in any given day or directional move before price reverses.

• To do this you need to understand and apply two principles: o Principle #1: Your profit exits will depend on the character (direction and volatility) of the day. o Principle #2: Your profit exits will depend on the character (direction and volatility) of the bigger picture market environment.

• We discussed how the character of the day and bigger picture greatly influence which zones are important, which ones you’ll trade at, and which setups will form, but they will equally influence your profit exits. The direction and volatility, which make up the character of the environment, are exactly what context is all about. The more things are aligned, and the more important your zone, the larger the profit targets you will shoot for. You’ll always need to have this sort of dynamic and fluid reading of the market to determine your exits. They shouldn’t be “one size fits all” rigid sizes if you want to maximize your profit potential.

• To help you exit effectively and guide you with good structure to navigate complex market environments, we’ve broken things down to 5 specific profit exit techniques, with 3 rules to implement those techniques effectively.

• Technique #1: Exit at the next support / resistance zone. This is a very logical exit technique because price will often move to the next zone after reversing at the current zone. And on average it will move with less struggle and effort (i.e. more swiftly and efficiently) in between zones. This doesn’t mean that you have to exit at the very next zone. The context could be calling for a larger move that will take you to a further zone. The idea, though, is that your target is the next important zone that you feel can be reached, whether that’s the very next zone or a further one.

• Technique #2: Exit when price exhaustion occurs. If price exhaustion in the correct context can warrant an outright trade, it can definitely warrant an exit of an existing trade. If you’re in a trade and price has already made an extended move with little retracement, a large volatility and volume expansion could mean that we’ve seen price exhaustion and the odds for reversal go up- which means that an exit makes sense.

• Technique #3: Exit when meaningful divergences appear. If divergences are good enough to get you into a trade, they’re valid reasons to exit a trade. Just make sure that the divergences are meaningful and persistent. And if they’re happening at as price reaches a zone while you’re still holding your position, this may warrant an exit, absent any major reasons to hold the trade.

• Technique #4: Exit at a statistical target. Since we have some reliable stats of market behavior, we can use this knowledge to help us exit effectively. We can identify certain price targets that have high odds to be reached under the given context based on historical stats.

• Technique #5: Exit when a typical market rotation is reached. Every market has its own price character and volatility. If you study your market enough, you’ll get to know the typical size of market rotation off of support / resistance zones and between swing highs and lows. This isn’t an exact science by any means, and it will depend on the type of day you have and what the bigger picture volatility is like at the momentum, but if you have a good grasp on those, than you can often have a feel for the typical minimum size of reactions your market will exhibit.

• Rule #1: If you lack conviction on how far the market is likely to move, and / or there is no specific logical target nearby, scale out of half the position at an economically viable level, and exit the rest using one of the exit techniques. Make sure not to exit half at less than a 1:1 reward to risk ratio just for the sake of emotional comfort, rationalizing that you are reducing risk. This is not economically viable. But if you do this right, it will allow you to hold trades to larger targets when your directional conviction is not very high. And also make sure not to quickly move your stop to breakeven after scaling out. At all times, you want to keep your stop at a level that would invalidate your market view if it was hit. Don’t place your stop at breakeven or any other place just to avoid losing or to protect profits unless that place also makes sense from the perspective of your market analysis. Otherwise, you will get taken out of good trades prematurely based on market noise.

• Rule #2: If you have conviction on how far the market is likely to move, and you have a logical attainable target, let the position ride to that target without scaling out of half of it. This goes directly against the teaching of many trading educators who tell their students to always scale out of a part of their position. They know it feels good to ring the cash register early and they know that they’ll attract more paying customers if they sell this sort of advice. But the reality is that this advice is not logical and it will hurt your bottom line in many instances. So the better option is to train your mind to be able to ride the discomfort of holding a position and having the risk of it coming back for a loss. While in some instances the loss will occur, overall your bottom line will be much better off. And you will realize this when you notice that exiting half of a 5R trade at 1R will make it a 3R trade overall (5R+1R / 2), which means that you just lost 2R of profit. Whereas an outright stop-out will result in only a 1R loss when you don’t scale out. This means that you are hurting your bottom line overall by losing out on more than you save in many instances.

• Rule #3: Do not micromanage the exit on a smaller time-frame than you used to enter. When you’re in a trade, it becomes very tempting to read every little wiggle in the market because of your fear of losing profits. You have to have the discipline not to fall into this trap. It will cause you to exit prematurely, and your mind will rationalize it in the moment very skillfully. You have to zoom out and keep your mind on the full context that got you into the trade to begin with.

Advanced Setups and Techniques

• Until you’re a consistently profitable trader, there is no reason to be looking to trade advanced setups. First, become skilled at the basics, and then look to expand your repertoire. You can have a very good and profitable trading career without trading any advanced setups.

• If you’re already consistently profitable however, adding more setups to your repertoire can increase your bottom line by providing you with more trading opportunity. While there are potentially an unlimited number of setups that can be traded, for our particular style we highlight 3 advanced setups.

• Setup # 1: Demand / Supply Walls: A demand wall occurs when the market is selling off and hits a point where all the selling pressure is being absorbed by buy orders sitting in the order book. Everything looks bearish but the market can’t seem to go lower. A supply wall occurs when the market is rising and hits a point where all the buying pressure is being absorbed by sell orders sitting in the order book. Everything looks bullish but the market can’t seem to go any higher.

• A great charting tool that allows you to see these hidden walls comes from the Market Delta platform (www.marketdelta.com) and their Footprint charts. These types of charts show you the actual trade flow (contracts bought at the offer versus contracts sold on the bid) in chart form. They give you the ability to see volume at price on much smaller intraday timeframes than you would see with a volume profile chart of the day.

• To trade off of this chart, we use a reversal chart instead of a time based chart. In normal markets, we use a 5 Tick reversal chart for the S&P E-mini Futures (ES), which builds a new bar each time the market has a 5 Tick reaction. During times of greater volatility, this is increased as the market will easily move 5 Ticks and we won’t stay in one bar long enough to show any real volume accumulation. You will have to experiment with your own market to see what reversal size shows you a decent amount of volume accumulation at each price. If you use too high a number, you will keep accumulating volume at each price within the same bar, and the end result will simply be a full day volume profile chart. The idea here is that we want to see horizontal volume accumulation on smaller time-frames.

• The way we use this as a setup is to look for places where we either see a major wall or major equilibrium from both sides, showing a high amount of volume build up. This isn’t done in a vacuum. The two most common uses is during trend days, and at key reference areas. In trend days, counter-trend reactions will very often stall at these walls or equilibrium points, and because there is overall conviction in the direction of the trend, that stall will often mark the end of the reaction and a resumption of the trend. This is especially the case if it’s combined Copyright © 2012 OpenTrader Training, LLC. All rights reserved. with another setup.

• By contrast, during other day types, a directional move will often reverse at support / resistance if we build up large horizontal volume there, as one side’s orders get absorbed and then they are forced to liquidate or cover after their buying or selling pressure has been exhausted. On the charts this will show up as a very dark red (the actual color depends on what you’ve chosen, but we use red and green) at support, and green at resistance. It’s counterintuitive, but the darker the red without the market breaking down, the more bullish, and the darker the green without the market breaking out, the more bearish.

• Setup #2: News Non-reactions: When the market shrugs off better or worse than expected news, it’s telling you that it’s either weak or strong respectively. There may be an initial reaction in the direction of the news, but if it’s short-lived then you are seeing a different internal picture.

• While this type of thing can often act as a great tell for an ensuing directional move, it’s advisable not to trade it in a vacuum, but rather to only take a trade if it’s at or close to a support / resistance zone. The non-reaction to news can be your tell that you should trade at that zone (if it’s not already an automatic trade zone).

• This type of setup can often also be good for confirming a potential trend day idea, whereby the market is taking off early and then news comes out which would typically make it reverse, but it can only manage a slight reaction and is now resuming its original directional movement. In this case, this is a good tell to aggressively jump on board the early momentum if you haven’t already- especially if we’re showing a mini extreme in price (and TICK for the indices) but price is still holding. In that case you can secure great trade location.

• Non-reactions to news can also help you with your exits. If you’re in a trade and better than expected or surprise news comes out supporting the trade, and yet the market can’t move in that direction any further, it’s often a good time to take your profits.

• Setup #3: False Breakouts & Failed Patterns: This is an often talked about setup, but what makes it an advanced one in the way we apply it is the fact that the trade is taken before the failure has been confirmed based on deep contextual understanding and analysis.

• To take this type of trade in this manner, you really have to think in terms of long-term odds and just take it at the scariest moment with the assumption that you will come out ahead over time. It will help greatly to see other setups showing confluence at the moment of the breakout or seeming pattern confirmation, like a major TICK extreme, a divergence, or a supply / demand wall.

• What makes this setup powerful is that the acceleration the other way can be very swift as everyone who was trading the breakout or pattern will now be stuck with a losing position and be forced to exit. A good profit target is often to the other extreme of the balance (or to the initiation point of the pattern) and if this happens quickly, we’ll often see a move through to the other side- especially if you took the failure during a counter-trend reaction in a trend day. In those cases it makes a lot of sense to hold for a break to new highs or lows.

The Exit Techniques In Action

• In terms of exit mechanics, you can choose to place limit orders ahead of time and let the market take you out as price hits your order, or you can place a market or limit order at the specific time you want to exit.

• The benefit of having a standing limit order in the market is that you’ll often get your exit order hit as price hits an extreme, which gets you out at the peak of the momentum. Without having your exit order already sitting in the market, sometimes price will snap back very quickly and you won’t get your exit, or will be forced to exit at a worse price. Also, it’s a more relaxed exit style that can allow you to step away and let the market work its way to your order. On the other hand, not having your order already sitting there allows you to get more profit at times, as you wait for the ideal momentum peak to exit during sharp moves instead of being taken out early during a strong ensuing move. Ultimately, it’s a matter of personal preference, and you can choose different mechanics at different times based on the context.

• There is nothing exact in trading, and you shouldn’t be shooting for “exact” in your exits. If you felt that the context called for at least a 5 point reaction, or should hit some important zone, but the market showed a price exhaustion or divergence extremely near or right before it hit your target, just go to market with your order and exit, whether you already had an order sitting in the market or not.

• An insight that will help you with your exits (and entries) at times is the fact that after strong trend days, we will often see some sort of follow through. It’ll rarely be major follow through (i.e. another trend day), but the directional conviction will usually spill over to the next day. The movement in the same direction as the trend day will often be limited as we extend the range of the previous day, and we will typically see some sort of consolidation and balancing action. But if the market tests the prior day’s afternoon resistance (downtrend) or support (uptrend), those are often great entry points with the exit often being some sort of retest of the extreme of the previous trend day, or a push through it to some new support / resistance zone.

• If you have high directional conviction during a high volatility environment, extended exit targets are likely to be hit, and you can often shoot for bigger moves in absolute and relative terms. Always be thinking in terms of how much directional conviction and volatility there is in the market on any day, and in the context of the bigger picture. This will make you much more efficient in your exits.

• To effectively exit a profitable trade, it’s not only about knowing where and when to exit, but also having the ability to actually hold the trade and sit through scary retracements against you.

• One great method that you can use to help you sit through tough market action on the way to an extended target is to make use of market statistics. One market stat that can prove very useful in this regard is that in normal volatility market conditions, the odds of having an inside day is only 15% or so (this drops to about 5% in volatile environments). This means that 85% – 95% of the time the current day will either break the low or high of the previous day (or both) and won’t be contained in the prior day’s range.

• The way this stat can be used is by applying it to the market context. If, for example, you are in a high volatility environment that is breaking down strongly on the larger time-frames, and yesterday was just a downtrend day, and the odds of having an inside day are only 5%, then the odds are extremely high that we will break yesterday’s low sometime during the current market day.

• When you add to that the stat that the high or low of the day comes within the first hour 70% or so of the time, it gives you powerful information that can give you high confidence that you will reach the low of the previous day (or high in other scenarios), despite scary market action that makes it looks like the move is reversing.

• Even though these stats won’t give you certainty, they will give you very high odds and that’s the best thing we can ask for in trading. Simply think in terms of long-term probabilities and hold for the targets. Sometimes it won’t work and you’ll feel bad, but the vast majority of the time it will and you will come out far ahead overall. The thing to remember is that you will never have large profit trades without being willing to sit through retracements and watching your profits seemingly evaporate. Being willing to do this is what will separate you from most traders.

• Profit exit rule number 3 was that you should not micromanage your exits. This happens when you use short term market behavior as a reason to exit even though it doesn’t invalidate the hypothesis of your trade. This could be, for example, if you exit on a TICK extreme and range expansion after some movement thinking it is an exhaustion while you had entered the trade based on bigger picture rationale and a high likelihood of reaching a certain zone. The extreme will likely cause a reaction but you’ll eventually reach the target if you stick with the trade. So the lesson here is not to use one set of criteria and time-frame when you’re entering, and then switch to other smaller ones for the exit.

• It only makes sense to exit prior to a logical and statistical target that you have if you see major signs of potential reversal lining up. This could be a major exhaustion coupled with some persistent divergences over time that show up on the larger 5 minute or higher timeframes. These could be invalidating your trade hypothesis. But anything less than that and you’re likely faking yourself out and taking a much smaller profit target than you could get.

Maximizing Profit Exits On Trend Days

• Given that we know that most trend days close near the extreme of the day, and given some stats that show that on strongly trending days (with very biased market internals for the equity indices) the low or high of the day is made within the last hour of the day about 95% of the time (i.e. such early high conviction moves very rarely end up reversing during the day), it makes sense that if you get on board an early trend and it starts confirming, your goal should be to hold the trade until the last hour of the day. You don’t scale out, and you don’t take quick profits. You hold and let the odds play out.

• This is likely the toughest thing to do psychologically, which is why very few traders can do it, and why very few trading educators teach it. Most people choose comfort in trading over their bottom line. But if you want to be able to achieve this, which will be incredibly beneficial to your bottom line, then it greatly helps to simply make it a rule. Whenever we have a rule, it takes the responsibility off of us and doesn’t require us to constantly make decisions. In this way we stop feeling regret and judging ourselves when things don’t work out. After all, we just followed the rules. And following this rule will make you a lot of money over the long-run. Yes sometimes you will lose some big profits as the trend reverses, but the vast majority of the times you will get huge winners that can make your month.

• One thing that will make it easier to hold the trade until the last hour of the day is your ability to protect profits as the trade moves further in your direction. However you can’t be too eager to protect profits and try to trail your stop too close to the market action. The general rule is that you want to have your trailing stop at a point which would invalidate your trend day idea. It may take quite a while before you can move your stop to breakeven or to a place of profit. You simply have to accept this and again treat it as a rule. But once you can move your stop to a logical area to protect profits, it will be easier to keep holding for the rest of the day.

• While holding the trend trade you will have to sit through many scary retracements at times, where you see your profits evaporating. This is simply part of the game. You will never be able to have huge profits unless you can sit through large retracements, as uncomfortable as they may be. This is what all the great traders can do. Your goal should be to emulate them.

• To exit the smaller independent setups you use to get on board the trend, you simply use the exit techniques you learned earlier for those setups. The only difference here is that since trend days have such high directional conviction, you don’t need high reward-to-risk ratios to warrant a trade. The accuracy will be quite high if you’re timing your entry patiently according to the correct principles we’ve discussed prior.

• Of course you should always be shooting for as high of a reward-to-risk ratio as possible, especially during morning and well-timed afternoon trades. But during the mid-day trading where things can get slow and choppy even on trend days, you can often have high odds 1-to-1 trades that still provide good edge- selling at resistance or exhaustion for a high odds pullback, or getting long at support or exhaustion for a high odds bounce.

• In terms of scaling out, the same rules apply for these trades that do for the zone fade trades. If your conviction is high that you’ve caught great trade location, then don’t scale out. If you feel you have a good short-term entry but are unclear as to whether the move could ensue before putting in a larger retracement, scale out of half and look to ride the rest of the position. Or just take the whole profit at 1-to-1 if you’re timing high-odds counter-trend retracements well.

Riding Trend Days With The Fade Setups

• The market won’t give one-way directional days very often. So when it does, you have to be more aggressive and really look to milk as much profits as you can. Your trade odds will be higher on such days, and the profit potential of any trade will also be higher. So knowing how to ride the trend and take multiple good trades out of it will greatly improve your bottom line.

• The trades you take to ride a confirming trend day will be independent of the original trade you may have taken to get on board the trend early. The early trade is known as your core position that you look to hold, and then you will look to enter new independent trades. By independent we mean trades with their own entry criteria, stop, profit exit, and position size. You can take a loss on such a trade while you’re still in a large winner from early in the day (core position), and the original trade will not be affected by this one.

• To ride the trend, you can use the fade setups you learned before to fade the counter-trend reactions. And the most common and consistent setup that works on trend days is the exhaustion setup.

• To trade the exhaustion setup correctly when you see major directional conviction during the day, you have to assume that any counter-trend move will fail once it hits a momentum peak. This is a logical and correct odds-based assumption because the other side is in control and counter-trend moves will have a tough time being sustained. And it is this assumption that will allow you to take the trade at the time it seems the scariest. You won’t be thinking “what if it keeps going and I take a loss?’. Rather, you’ll be thinking longer-term and realizing that over a large number of these trades you will come out far ahead.

• If you’re trading the equity indices, you can use the TICK as a good indicator of momentum extremes. Often TICK extremes will coincide with the highs or lows of the counter-trend retracements. This is especially the case in the morning where we usually get shallow pullbacks. In the mid-day and afternoon we often get larger retracements and sometimes the first TICK extreme will cause only a small pause before a second or third one creates the eventual price extreme.

• If you’re trading commodities or any other market, you can use range expansion as a proxy to the TICK. When price moves quickly we get larger bars (i.e. range expansion) and this shows a momentum extreme that often marks the reversal point, especially if it’s occurring after a decent price move.

• Don’t be scared off if the momentum extreme is coming off of a technical analysis price pattern like a double top / bottom or a head and shoulders pattern. If these patterns are coming against the trend, they will often fail at the moment they seem to be really confirming and taking off. These actually present great fade opportunities during trend days because more traders will get caught trading them against the trend and price will accelerate in your direction as they are forced to exit.

• To really play these setups effectively and be able to ride the trend aggressively, you need to be willing to re-enter on the next extreme if you take a loss on the first one. Often the next one, as scary as it seems (especially after you’ve just taken a loss) will be the perfect entry. And without the willingness to enter you’ll end up staying at a loss instead of an overall profit.

• A good setup for riding a trend is to get on board when you see a divergence in a counter-trend reaction. You have to make sure that you’re entering with the trend and not against it. That’s why you should ignore divergences against the trend of the day. These can be seen often, especially with the TICK, but they should be ignored and not used as a reason to fade the trend even if you see them providing a tradeable reaction at times. Overall, there’s no edge in trading them.

• As far as taking divergences during the counter-trend reaction for a trade with the direction of the trend, they can prove to be good setups, especially if they’re double or triple divergences or there’s a confluence with other setups.

• Another good setup for riding a trend is to jump on board a breakout from an intraday balance area. If you’re in a generally high volatility market environment, or the instrument you trade is a high momentum one that makes quick directional moves, then it makes sense to get in on the breakout as you would on an early balance breakout to get on board to the trend to begin with.

• Yet another setup is to enter at intraday support (in uptrends) or resistance (in downtrends). Fading intraday high volume nodes, tails, or range extremes if they’re tested can often be a great entry point with the trend, especially if the test is coming on an extended vertical move against the trend (in which case it’s likely to be exhausted and have even less chance to break through the zone). Like always, the trades that look and feel the scariest in real-time are often the best ones.

• Finally, in the absence of other setups (or in confluence with them), you can use a Fibonacci retracement to enter with the trend. The most common ones are the 38.2% and 61.8% retracements. There’s also the 50% retracement which is widely used, and that one is actually not a Fibonacci retracement but rather one used by the old floor traders extensively. Either way, we don’t have a particular stance about whether these numbers have any real significance on prices. The bottom line is that we’ve seen them work consistently, and whether that is due to a mysterious order in the universe or a self-fulfilling prophecy, it doesn’t really matter so long as they work.

• But for them to work, you have to use them in the right context. You should only be looking at these retracements after steep directional moves, preferably in trending markets. If you look for them in range bound markets you are likely to get chopped up as there will rarely be directional continuation after a retracement.

• Ultimately it’s good to see other setups to get you into a trade, but on strong directional days, the retracement of the initial move will often end at 38.2%, especially in morning trade. So this can be used to guide you. If you’re getting a very extended pullback and it hits the 50% – 61.8% zone, if the bigger picture context still points to high odds of a trend day this will often be a great fade as price will rarely ever retrace more in true trend days. On trend days, you simply have to trust that the trend will eventually continue, because the odds of it reversing are low when one side is clearly in control within the right bigger picture context.

• As a final note, don’t wait for these retracement levels to get you into a trade if you’re seeing another setup prior to hitting them or if it’s early in the day and you’re trying to get on board the trend with a core position. Waiting for these levels can cause you to miss many trades.

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