A few weeks ago, I was on a side street and stopped at a four way stop. For those unfamiliar with what that is, it is simply a stop sign on all four streets leading into an intersection.
I watched another driver head towards the sign but never noted a slowing down of the vehicle. I never even saw the driver move their head to take into their surroundings.
We often see things that don’t jive with what we expect to happen and taking note of it can often save us some grief. (Read the book Gift of Fear by Gavin De Becker for more info on that)
Seconds later, the driver flew through the sign. I confirmed that drivers intention by waiting to see what they would do. That confirmation saved a possible accident.
In trading though, trade entry confirmation can cost you.
Trade Entry Confirmation Friend Or Foe
A recent article I wrote, Get Your Trade On, gave examples of many triggers for a trade entry that can get you into the market when a trading opportunity sets up. Actually, you can also use them to get out of trades but that is another story. Here is the thing with triggers and that is that they amount to trade confirmation.
Is confirmation a bad thing?
Depends on how you look at it. As an indication that the trade has a higher probability of going in your favor, they are great. For better position sizing, they are not so great. It also depends on how conservative you are with your trading.
In my swing trading, I don’t wait for any confirmation. I set up the trade at levels that have a high probability of holding.
Here is an example……
Four hour chart of the GBPUSD. For those who know the four stages of the market, the daily chart appeared to be a stage three which is the distribution stage. On the four hour, I had some confluence that were obvious:
- Stood out like a sore thumb giving me a former resistance area and then a zone where price was not leaving from.
- There are a few Fibonacci numbers I love and those are the 61.8 and 78.6. Not to ignore the 50 although it is not a Fib number and I will look at that during the middle of the move.
- 50 SMA going flat line after price spent a considerable amount of time far from it.
- Local support level that, if had a ton of interest, would have soundly rejected price.
For me, that was enough confluence to go for a trade at #2.
Where does the protective stop go?
Above the high which gives a risk of 75 pips after front running the 61.8 level. The front run of 78.6 never triggered. AB=CD target gives 193 profit and the extended 1.27 is 243 pips. Targets also line up with price structure to the left of the price move.
Great risk/reward and pretty hands off which is what I like about swing trading.
If I needed confirmation such as a break of the low before the pullback for my trade entry, the risk profile increases. If using the high of the swing before the break down (around #2), I am looking at a minimum 119 pip risk.
Going to the high, risk is almost 200 pips!
The Cost of Trade Confirmation
Let’s break it down into dollars. Consider an account of $5000 and you will risk 1.5% of your capital per trade. Without needing confirmation as explained above, you are looking at $75 risk. That would equal 1 mini lot that you could trade and would give you $193 gross profit. If using the swing level for your stop, you are looking at 6 micros or .60/pip.
Total gross profit at first target is $115.00.
Is trading without confirmation for everybody? Probably not. I use a confluence of factor to zero in on an area of opportunity. I am also not hesitant to get out of the trade when I have made a mistake.
This is not something I reserve just for swing trading. During my day trading, I am not adverse to trading without confirmation depending on the action of the day. Of course, the margin of error is much smaller and again, getting out of a bad trade is not something I hesitate on.
Again, is this suitable for everybody? It depends on your method of trading and the biggest factor – your psychological state.
If you are one who thinks the market will always come back and have issues exiting trades, this is not for you. However, for those who find they are pretty adept at finding areas of positive opportunity, it may be something for you to investigate.