You make your trading choice and live by the saying “whatever will be, will be”. Easier said than done of course but an extremely important part of finding any success in this business.
So what does this mean?
It means to stand by your choices you make in your trading
Assuming you know what a pennant is, let’s say that after scanning a few charts, you see the pattern emerging and after reviewing context, decide that this is a trade you want to take.
There are a few questions to answer including:
- Where to enter
- Where to stop out
- When to take winners
These three questions must be answered before entering the trade and without knowing them, you should assume you don’t have a possible trade.
The Big 3 In Trading
- Where to enter: While there are many methods for “pinpointing” entries, it does not have to be complicated. Some will play the breakout, rejections, or a new bar high while others just get the trade on.
- Where to stop out: If you don’t know where to exit if the trade is a failure, how will you ever consistently manage risk? You often hear to place your stop where you’d be proven wrong but that area can often be played by the bigger money (more on that in a later post).
- When to take winners: Lots of options here include one times the risk then trail, chart patterns, structure…..
On this chart, you come across the following pattern. Whether or not it fits the exact definition of a pennant is meaningless. What matters is if it exhibits much the same “action” as the text book definition.
A. Solid strength in the run up to the pause in price. Is that important? While not a 100% guarantee of a continuation in the up move, the odds favor a continuation once the pattern resolution occurs.
B. The move up does not appear to be a climax in the up move.
C. The formation of our pattern.
Some traders simply buy into the pattern when it starts the tighter consolidation as shown with label #1.
Other entries can include the actual breakout at #2, the break of the open of a candle at #3 or, not shown, a failure test of the base of the pattern or a break of a consolidation on a lower time frame.
Protective Stop Placement
Stops can be a little tricky as you want to ensure a decent position size while ensuring you are out when the trade is no longer valid. Many traders will place it just under the low of the pattern as shown by the red line.
The problem is…..many traders would place their stop there (easy running) plus a price poke below does not invalidate this setup.
My choice is the blue line which keeps it out of the noise of the market although neither of these stops were challenged in this setup.
Taking winners has many options such as scaling out equal to risk and leave a runner. What matters is the consistency of what you do.
The Hard Part Of Trading
Once you have your entry criteria, your escape if the trade goes against you, and how you will take winners the next step is the hardest:
Leave the trade alone.
But that is exactly what you have to do.
Here is an example.
After a sloppy run up in the EURUSD, I sell stopped and was triggered into the short. I had a scale out target equal to risk that left no risk on the table of the trade.
Price missed the scale out by approx 50 pips and started a move back up to an area that was showing resistance and started to challenge my stop. The green candles were certainly larger than the previous red and I honestly had to fight the urge to save a few pips and market out of the trade.
I had to resort to “whatever will be, will be” and since I already accounted for the risk on the trade, it would have been a loss amount that fit my overall plan.
That said, while the reversal type candles didn’t justify an exit, the first green candle did as it appears to be momentum against my position. If I was actively managing the trade, that would have been an exit to be comfortable with because the point of a swing trade is to take one clean swing in the market.
The green candle ruins the clean swing aspect.
The trade has since recovered and I had to add the scale out back in as the order had expired. The question is what happens if the move fails again?
While “whatever will be, will be” is a great mantra, it’s hard to ignore an obvious change of state of the market. Trying to be consistent is job #1 however blindly following a rule when all objective signs point to exit can erode much sought after success that often times are hard to come by.
Get your trades on and let them play out. That is, until the run for the exit begins.
For more updates from Mark and the team at NetPicks, be sure to visit their trading tips blog at NetPicks.com.