BPA trading room Q&A: June 17, 2015
I bought the 36 low going for a two-point scalp, using a five-point stop. Planning to scale in two points lower. I ended up and exited at the 41 close. Can you comment on this and review your trades?
Video duration: 5min 48sec
Trade management: Scaling in, gaps, and stops
Bought the 36 low, added on two points lower, then got out on the 41 close. I think all of that is okay. My only thought about that is the one that I said. Whenever the market is still forming gaps going down – for example, 29 high gap, 23 low, right? As long as it’s forming gaps, I think the probability of a successful buy at a new low is much less than if the gaps close. So if 29 went above the 12 low, then I think scaling in below 28, or below 36, or below 34, had a better chance of success.
And what about the idea of a four-point stop or a five-point stop? Well, there’s some magic number, right? The wider the stop, the less likely you get stopped out. So if you use a 10-point stop and scale in, you would have done great. And a four or five-point stop normally is enough, but you just never know.
To me, I’m just a little cautious about buying below bars until the gaps are starting to close, and so that would be my only concern about that trade. Otherwise, buying the 36 low, adding on two points lower using a five-point stop usually is okay.
Size of breakouts
Another way to look at it is in terms of size of breakouts. Breakouts should be getting smaller, okay? So this low to that low. And let’s check the next breakout. That low to this low, the breakouts are getting smaller. But then look down here; the breakout got bigger again. That is usually not what happens. But it’s an FOMC day.
A lot of traders thought just like I just said, that breakouts should be getting smaller, so they felt good about buying below 34, but they were all weak traders who were going to get stopped out, and you were one of them. And that’s what I was saying down here, that those scale-in bulls are all gone. This would be enough to flush them out. It’s a bigger breakout than the prior breakouts.
On the other hand, strong bulls will buy, and strong bears will no longer sell. I think the strong bears see the consecutive sell climaxes, the wedge, a lot of two-sided trading, a big report coming up soon. I don’t see the bears selling down there.
So, in hindsight, four-point stop, five-point stop, usually reasonable. So it should have worked, but today was an example of a day that it did not, and I think it did not because gaps did not close: 29 high, open gap on 36 high, open gap. Yes, the gap is a little bit small. I don’t know if the gap is getting smaller. But anyway, that is my concern.
Al’s trades review
In terms of scalping early on, what did I do? I sold the 3 high. I sold below 6, got out breakeven. I sold below 19. I sold right before the 24 close. I sold the 25 high. And got out of my last position somewhere down here, and I missed this. I bought the 43 low, and that was my last trade before the FOMC report.
I bought 55 as it went up. I bought 60 as it went up. I placed a limit order to buy here too late and did not get filled. It went down, I placed the order, by the time I had my order placed, I did not get filled. And it went up, and I ended up buying late – I think at the end of 61.
I did end up selling up here, but I only got out with one point, which was dumb. But that happens. And then I did not trade here. And then I traded the Dollar Yen on the report also.
Follow up question on stops
Last week you discussed proper stop management using the ES chart on June 11th as your reference. In your book, Trading Price Action Trading Ranges, you talk about initial stops just beyond the signal bar. Can you use a different stop strategy? Can you elaborate on the subject?
In general, if a trader is buying a reversal, like “Here’s a possible reversal,” a good location for a stop is below the bar, right? So if you buy above that, protect your stop one tick below. On the other hand, if you think you might be in a trading range and you think that the market might have one more leg down, and if you’re able to trade bigger, you can, instead of getting stopped out there, buy small above 10, buy more at the 10 low and use a wider stop down here, thinking that if we do fall below 10, um, we will reverse up. And that happened, last week, Monday. Maybe this was it.
Typically, in a situation like this, when I think we’re going to reverse up, I’ll buy above 4 and I’ll buy more at the 4 low. And on this particular day, I did not. I bought above four and put a stop below the 4 low, and then ended up buying again over here. I think both are mathematically acceptable. I think most traders, in general, if they buy, they should put a stop below their signal bar if they’re buying a reversal. So if you buy above 4, you stop out below 4. You buy above 13, you stop below 13.
However, if you’re pretty confident about your read and you’re able to use a wide enough stop and trade small enough, you can do the opposite. Instead of buying above 4—stop below 4, you buy above 4, you buy more below 4, and use a wide stop.