Trade setups and entry seem to be the most sought after trading information and for good reason: without a trading setup, you’d be trading blind and without an entry, there’s no position.
The issue is that while traders know how to enter a trade, finding a profit target and a break-even point or just to slightly limit risk, seems to be forgotten but are needed for any trading strategy.
Let me say that there is never a “best” place for trade management. There will be times you limit risk by moving your stop and then it gets hit while the trade is still valid.
You will exit trades for profits only to see price continue in your favor.
If you approach your trading as a risk manager first, that can alleviate some of the frustrations that you will get when those things happen. You did your job, protected your account, and will live to trade another day.
Rhythm To The Market
We know that markets make higher highs and lows when moving up and the opposite when heading south. A higher high can only be made when price is pulling back and depending on your trading method, this presents both long and short opportunities.
Looking at the following chart, we can see that price is in an overall uptrend.
Clearly an up trending pattern with price making higher highs and higher lows. Traders generally want to be long in these markets but they also love to catch turning points in the market.
I think there are too many contrarians who are looking to pick tops and bottoms as routine. There will be times that is applicable and I wrote about that in my article about trapped traders and the order flow they provide.
- Price puts in a top and it does not appear to be a climax move which in my playbook is important context for a counter trend trade
- We still have a higher low so the uptrend is still in play
- Failure to make new high and momentum against the upside is cause for concern
Some traders will use that failure to make new highs and momentum against the trend as a setup for a short below point number 2.
Not a bad play because what price pattern does a down trend produce? Lower highs and lower lows. Breaking the highest low at number 2 puts in a lower low so we have both conditions in play on this chart.
But it’s not that easy.
Trend Change Or Complex Pullback?
A simple pullback is one leg and then we get a continuation in the direction of the trend. In our chart, if price continued to rally past the highs, our trend continuation is a success on one swing on this time frame.
Lower time frames could show a complete down trend structure and then a resolution so remember that time frames do a play a part in our chart formations. It is entirely within reason that an intra-day trader could be trading a down trend bias – because that is what their time frame is doing.
Until our chart has the pivot at 2 taken out, we still consider an uptrend or at worse, a range if price can’t break highs.
Let’s assume that you need to see price rejection to take a shot to the upside. I personally don’t just “buy support” but need to see some type of price rejection. Go back to the trapped trader article linked above for an example of one of the things I look for.
But you also notice the previous pullbacks are one leg, you understand the rule of alternation and expect to see a complex pullback
You can see the two legs in this price correction and the green arrow highlights immediate price rejection. All things taken together, you place your trade above the high of the reversal candlesticks and allow momentum to pull you in.
The big red candlesticks are showing momentum to the downside. While we can never know for certain the intent of the those traders, it is safe to consider that:
- Some are long traders selling their position when the trend did not continue to the upside
- Some are traders taking a trading position short when they did not see the trend continue
Going back to the usual teachings, where do you think most traders who are short have placed their protective stop loss?
Read The Minds Of Other Traders
Common wisdom is to place your stop loss in a position where you’d be wrong on the trade.
The red zones are the usual spots for traders to place their stop loss and you can make a case for both of those locations. Support and resistance zones appear to be a common location for traders but you should determine what you consider a resistance level if you take a short positions or support level for long traders.
If we assume that is where stops are located, we can also assume that some traders will also look to position short in those locations because they missed the first entries. Is that a good play?
If this was the beginning of a new trend, you’d prefer not seeing price return to those levels too soon and a few things can happen at these often volatile price zones:
- Price can be rejected once again and the new trend emerges as more seller engage the market
- Price can run straight through those locations, stopping out the shorts, and propelling longs quickly through the highs
- Price can stall and consolidate
While we don’t know exactly what it will do, we do know something will happen and we can use that knowledge to our advantage.
Use These Structures As Reference Points
We know something will happen at these zones so it makes sense to use them as a point of reference for trade management. In the case of our chart, we have strong momentum into those levels and have nice gains in the open position.
The worst case for us is a complete meltdown in price that erases the gains of the last several days.
By having a take profit or some type of trade management in those areas we are using:
- The structure of the market in terms of previous turning points that offer potential resistance zones
- The rhythm of the market as taking out the high gives us the start of an uptrend pattern or a possible range
- Accepting that we don’t know what will happen with 100% certainty and we are putting our risk manager cap on
Your trading plan should contain the actions you will take at these zones.
- Will you scale a portion of the position and leave partial for more gains?
- Will you take risk out of the market by adjusting your stop and play the overall up trend direction?
- Will you be concerned about the momentum in the previous bear candlesticks and just exit full position?
Have a plan and consistently work that plan.
We Trade On Probabilities
We don’t know what, if anything, will happen when price meets those structure zones.
Knowing what we understand about those types of levels, the probability is that something will happen. If nothing does occur, having a plan in place such as scaling out at 1R (consider your risk reward ratio) and going to break even that you use on every position does speak to consistency which can never be overstated.
Think about it – if your position reaches at least to a multiple of the risk on the trade, is it not a success? Protect what you’ve earned.
After our complex correction completed with price rejection and eventual momentum, we ran into some issues that would affect how you manage the trade.
- In this example, scaling out a portion of your position around the price structure (I use pending orders at levels) put some money into your trading account.
- What we would not want to see is momentum against our position and we can see it here. When seeing strong moves against you, either tighten stop dramatically or exit
Using structure and unfolding price action allowed you to take profits twice on this particular chart.
Of course there will be times where you enter and price continues to fall and where price continues the trend. We never know when those times will occur so it makes sense to either monitor price action on every candlestick or set targets and pending orders to scale risk out of the market.
Taking Profits At Objective Levels
As you can see, there is nothing guaranteed or perfect in trading. Understanding Context, Structure, and the Psychology (CSP) of the masses can be a huge plus in enabling you to add money to your account on a consistent basis.
Some traders use a moving average or Fibonacci extensions for price targets thinking there is an edge in doing so. I’ve never been able to find objective statistics nor produce statistics that show an edge to using those trading indicators. That said, having some type of exit or trade management strategy is better than none at all and those will provide you with consistency.
More importantly, using those types of indicators will allow you to see a profit taking zone of interest and you can determine a risk reward scenario that will green light the trade or not.
Using these types of levels for profit taking can be a consistent way to add to your account because it takes into account the CSP. Using the scale out and trail type of exits can make this more effective and I will cover that in a future article.
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