Here is another great article from Al Brooks with ‘walk-through’ examples how to use price action with various types of trendlines.Copyright: Futures Magazine
Category Archives: article
I have found this article in the Nov, 2010 online issue of the Futures Magazine. Part of the article (on Page 2) explains the Breakout Pullback entry method which is crucial part of my trading strategy.
Basic breakout methods
The schematic “Breakout entry techniques” (right) depicts two different means of trading breakouts. Both are short entries. Entry one makes use of a sell stop market order with a price just outside (below) the breakout level. Some traders prefer this type of entry because it places them in the market when it moves in the direction of the breakout. However, it requires a somewhat larger initial stop-loss because of the breakout pullback phenomenon. Often, the trader will need to set an initial stop loss above the most recent swing high (labeled “A” in the schematic). Placing the initial stop just inside the breakout level (above it in the case of a short), puts the position at risk of being stopped out from normal market jitters.
Entry two in the schematic uses a sell limit order with a price determined to be at the maximum extent of the breakout pullback. In real-time, this level is not easy to determine. A 20-period EMA reference can be used or the trader can closely watch price action and when the market appears to have exhausted its pullback, a limit order entry can be placed close to the market.
The breakout pullback trade is attractive because the initial stop loss can be set just outside the entry price. This can be the previous swing high (“A”) or the 20-period EMA level.
Click here to read the full article on futuresmag.com
[…] A price action trader rarely enters on a breakout to a new swing high or low because they’re always looking for the earliest possible entry to minimize risk. This usually means entering on some minor pullback before or after the breakout.
For example, if you just bought a flag breakout before a new swing high, sell part of the long to the breakout traders who are getting long at the new high. Don’t buy at a price where people are taking profits on their longs because then the risk of failure is too great; too large a stop would be needed, and you would have to trade fewer contracts, limiting flexibility. […]
[…] Two of the most reliable entries are failed breakouts and breakout pullbacks because both involve trapped traders who will be forced to liquidate and move the market in my direction. […]
[…] Second attempts are especially reliable because the market is always trying to do something twice. If the second attempt fails, the market will usually try to do the opposite. That is why so many pullbacks have two legs. The market is making a second attempt to reverse and when that second attempt fails, the countertrend traders liquidate and the trend resumes. […]
[…] The second-attempt tendency also explains why a trend reversal through a trendline is usually followed by a test of the old extreme. If the test fails to resume the trend, the trend will try to go the other way, and it usually will make two attempts in the new direction, forming a two-legged correction or even a new trend.[…]
Reading through a short article on the Turtle Traders website about trend following there is a short list of common pitfalls in trading. Out of those I have recognized a few that I believe I have an issue with…
Anchoring and adjusting
In considering a decision, we often give disproportionate weight to the first information we receive, hence anchoring our subsequent thoughts. You can mitigate this risk by seeking information from a variety of sources and viewing various perspectives.
The decisions of investors are affected by how a problem, or set of circumstances, is presented. Even the same problem framed in different, and objectively equal, ways can cause people to make different choices. Framing, too, plays a central role in assessing probabilities.
Irrational escalation of a commitment
Investors tend to make choices that justify past decisions, even when circumstances change. To avoid this trap, investors must only consider future costs and benefits.
Investors tend to seek out information that supports their existing point of view while avoiding information that contradicts their opinion.
Mihalyi Csikszentmihalyi, former chairman of the department of psychology at the University of Chicago, a well-known research psychologist has spent most of his life studying this state, which he calls “flow".
Csikszentmihalyi identified nine elements of flow that he saw repeatedly in his research:
1. There are clear goals every step of the way. In many everyday situations, there are contradictory demands and it’s sometimes quite unclear what should occupy our attention. But in a flow experience, you have a clear purpose and a good grasp of what to do next.
2. There is immediate feedback to one’s actions. When you’re in flow, you know how well you’re doing.
3. There is a balance between challenges and skills. If a challenge is too demanding compared to your skill level, you get frustrated. If it’s too easy, you get bored. In a flow experience, there is a pretty good match between your abilities and the demands of the situation. You feel engaged by the challenge, but not overwhelmed.
4. Action and awareness are merged. People are often thinking about something that happened – or might happen – in another time or place. But in flow, you’re concentrated on what you’re doing.
5. Distractions are excluded from consciousness. Because you’re absorbed in the activity, you’re only aware of what’s relevant to the task at hand, and you don’t think about unrelated things. By being focused on the activity, unease that can cause anxiety and depression is set aside.
6. There is no worry of failure. In a state of flow, you’re too involved to be concerned about failing. You just don’t think about failure. You know what has to be done and you just do it.
7. Self-consciousness disappears. People often spend a lot of mental energy monitoring how they appear to others. In a flow state, you’re too involved in the activity to care about protecting your ego. You might even feel connected to something larger than yourself. Paradoxically, the experience of letting go of the self can strengthen it.
8. The sense of time becomes distorted. Time flies when you’re really engaged. On the other hand, time may seem to slow down at the moment of executing some action for which you’ve trained and developed a high degree of skill.
9. The activity becomes “autotelic” (an end in itself, done for it’s own sake). Some activities are done for their own sake, for the enjoyment an experience provides, like most art, music, or sports. Other activities, which are done for some future purpose or goal – like things you have to do as part of your job – may only be a means to an end. But some of these goal-oriented activities can also become ends in themselves, and enjoyed for their own sake. Csikszentmihalyi concludes by saying that “in many ways, the secret to a happy life is to learn to get flow from as many of the things we have to do as possible.”source: Dr. Steve Wright | meaningandhappiness.com
A good educational article about trend identification through price action… Good reading!
Click here: innerfx.com
Trading offers lessons in life; it is a microcosm of life.
In trading we learn to master ourselves, even as we develop skills.
Trading teaches us to identify and follow opportunities in the face of uncertainty.
Trading requires us to understand and respect risk, but not become paralyzed by it.
Trading pushes us to seek situations that offer more reward than loss, to stick with what is rewarding and exit what is not.
Trading requires that we be prepared and disciplined, that we continually learn and relearn.
Trading teaches us that there are times to be aggressive, to go after our convictions with confidence; it also teaches us the value of prudence and protecting what we have.
Trading calls on us to be patient–and to be decisive; to believe in ourselves–and to be ever aware of our vulnerabilities.
copyrighted by International Business Times