In our last email we showed you how to custom-tailor your trade management and exit strategies by avoiding a one-size-fits-all approach and selecting your optimum exit strategy based on what the market is capable of giving you.
Now that you know how to set up your charts to maximize follow-through and profitability as well as how to select the best exit strategy, let’s do a deep dive into ensuring that your entries are consistent and totally precise.
Although there are many ways to make money in the markets (trend following, countertrend, breakout, range trading, etc.) it is generally accepted that trend following is the most consistent way to ensure profitability.
Assuming that you already have a reliable Trend indicator on your charts, how do you select the perfect price point to enter a trade with a high probability of being a winner?
Entering trades on pullbacks or retracements has been generally considered the best way to achieve a low risk, high probability outcome. Think of a retracement has a stretched rubber band with built-up energy waiting to ‘snap back’ in the direction of the existing trend.
If the existing trend is considered accumulation, then the pullback would be considered distribution or profit taking during a trend. As new buyers (or sellers) come into the market after the retracement price will continue in the trend’s direction.
Avoid meandering pullbacks. The highest probability retracements are direct, typically within a 45° to 90° angle. Make sure that you have several bars in the pullback instead of just one or two. The TradeSafe System has a specific minimum number of bars.
The typical number of bars in a full cycle, from trough to crest to trough, can vary from 18 to 22 bars for most markets. Select an exponential moving average within this range as a basis for the maximum point of excursion during the pullback.
Ideally, you would want the bar that is furthest or deepest in the retracement to contact the moving average. However, in the TradeSafe System we have found that there is a tolerance both above and below the moving average that allows for more latitude without sacrificing accuracy.
To provide independent, uncorrelated confirmation that the retracement has reached its maximum point of excursion you will want to utilize an oscillator that swings from overbought to oversold. In the TradeSafe System we have a proprietary oscillator with specific settings that ensure the pullback to the moving average has reached its maximum point.
Finally, controlling your risk is perhaps the most important factor of all. Instead of using a fixed amount of risk for every trade, park your stop loss order after entry one tick above/below the high/low of the last bar in the pullback, depending on whether you are selling or buying.
You can determine the risk in advance of the trade entry by gauging the range of the last bar in the pullback and adding two more ticks to the range (one for the entry and one for the stop loss order after the entry).
Instead of chasing the market and risking slippage or poor fills, utilize a stop-limit order just as the last bar in the pullback is nearing its Close. Because it is a limit-based order, you will get zero slippage. You are relying on the market to trade through your resting order to put you in your trade. This is a much more strategic and relaxed approach.
Park your stop-limit order one tick beyond your setup bar’s high or low, depending on whether you are buying or selling. After price trades through your resting stop limit order, place your logical Stop-loss order one tick beyond your setup bar’s low or high (the opposite end of your setup bar you used for your entry).
Depending on which exit strategy you had preselected (see our previous email on selecting exit strategies), you will have either a fixed target for a scalp or a trailing stop if you had chosen to scale out.
To learn more about TradeSafe, please click HERE.
To watch a Replay of a recent online workshop about the TradeSafe Mechanical System, please click HERE.
Stay tuned for next week’s installment to learn more about how to best hedge your bet after entry in order to increase your percentage of winning trades.