BPA trading room Q&A: April 16, 2015
I bought the low of bar 10, going for a two-point scalp. Got stopped out for a six tick loss. Was this a bad trade, since a possible double top?
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Classic stop placement in tight trading ranges
So he bought the low of bar 10 for a two-point scalp. So he bought this low for a two-point scalp. And then I guess he had his stop one tick below 5, which is the classic thing that traders do, and that’s why, in these tight trading ranges, the market is gunning for stops. The institutional bulls know it’s a tight trading range and it’s not going to fall far. The institutional bears know it’s a tight trading range, it’s not going to rally far.
So most traders will do what you did, so they buy below 10 and they have to find some logical place for their stop, so why not just put it below 5? To me, if you’re putting it below 5, look at the breakouts. Here we fell two ticks below. Here we went two ticks above. I’m not going to put a stop one or two ticks below 5. If I’m going to have a stop, I’ll have it four or five, or six ticks below at a minimum, and I probably would buy more at the 5 low.
How to better structure trade
So for me, the way I would structure that trade, assuming I was able to trade two contracts, I would say, “Okay, I’ll buy at the 10 low, and I need to be able to buy more at the 5 low, and maybe use a two-point stop from there, or a six-tick stop from there. What size position can I use?” So that’s how I would have thought about the trade.
I understand what you did; you bought the 10 low for a scalp thinking that the 5 low might hold for the low of the day, but it’s really not a convincing low. What was stronger above 13 is — even though it’s a weak signal bar — it is the second reversal up. Third, fourth, or fifth if you count all these. So for me, that would be my issue. Using stops on the borders of a tight trading range is always a losing strategy. So if you’re using stops to get in, selling below 3, if using stops to get out, selling below 5, or buying at the top, it’s a losing strategy.
I would not put a stop one or two ticks below or above a very tight range like this. If I’m going to do anything with a stop, either to get in or to get out, I want the stop to be at least three, four, five ticks away from the prior extreme.