Last updated on June 19th, 2015
In my last post about trading exits, I pointed out that measured moves occur in markets in virtually every time frame.
The reason these are a popular targeting method is because in general, price loves to do things in two’s.
- Double tops are formed by price trying to break to the upside and failing
- Double bottoms are formed by price trying to break lower and failing
These doubles are usually traded by fading the second attempt due to the nature of price doing things in two’s.
If the market does things in two’s, could you consider trade entries on the first move in the direction too early?
Yes and no.
In a fast moving market, many times there is a pullback and the next impulse move just keeps on going. It happens and you will just have to miss a trade. Many times though,
those that take first moves as their trade entries have the market go against them, stop them out, and re-enter to help fuel the trade back into the trend direction.
Taking Trade Entries Using Seconds
Understanding this leads to our topic which is trading second attempts or second entries. In this introduction, it is impossible to cover the nuances involved in second entries
but let’s cover 3 important tips for those not experienced with trading them:
- You want to take them with the trend
- Location matters
- Signal bar formation
So what are we looking for with second entries?
What Is Important With Entries
Using a trend direction of short
- we want to see a low in place
- market rally
- attempt to resume trend and fail
- second attempt to resume trend
Looking at this chart, we can see lows in place and the first and second entries.
The first trade may have seen the early shorts stopped out depending on how far off the high their stop was.
This chart shows that longs and higher time frames work as well.
The first trade entry was the better one using the 1st entry.
The second and third trades both saw 1st entries stopped out.
Let’s take a close up look at the sequence in this next chart:
- The H is a lower high in the retracement.
- Price drops to a zone that held as support previously
- You get the first entry followed by a rally and strong retrace
- You get the second entry that rallies 482 pips
Let’s be honest here and ask yourself this — if you bought the first entry, would you exit before taking a full stop after seeing the extremely bearish action?
Clearly many did exit their trades!
A. After a strong run up, price trades higher but then closes near it’s open close to the low
B. The next day, same thing. Price rallies yet closes below the open and close to the low
C. Price regroups and buyers pile in which is obvious by the candle with small upper/lower shadows
D. The hammer drops and those longs get taken out with a vengeance.
E. Price tries to recover and ends the day positive but with obvious bull weakness
F. The day trades lower driving more and more longs out of their positions
Other traders looking to sit out first trade entries get a superb entry with pain free travel.
It’s not perfect….nothing in trading is.
However it will give you an objective entry point using the fluctuations and the behavior the markets generally show.
There are nuances such as waiting for a bar indicating that the trend may continue that you may want to seek out during your testing of second entries.
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