What To Do If The Markets go Against You...
There is an overriding question in most traders minds of course and that is, "is there a power that runs my stops all the time"?
If you are a newer trader you have likely asked this question quite a bit. You see something, you enter the trade, you are sure that you have done your due diligence and low and behold. The moment you enter price starts heading right for your stop.
Ever been in that situation?
I have many times. Many times I have watched price nail my stop to a tee and then head back down towards my target. A conspiracy right?
Not really. In the FX market it is more likely to happen to you this way because the market makers can make the market whatever they wish to make it. It is not so easy when you are trading a highly liquid market in futures like say Oil. The reason being is that with your one contract you are barely a blip on the radar. In other words you are so small in comparison to most of the market participants that for one contract or even two it is hardly worth the risk to try to come after you.
What happens more times than not is you get caught in the volatility which is the battles between the bigger players. They pound the market back and forth looking to keep price at a certain level. This battle is pretty powerful especially in the more liquid times like say the US open.
The only way you can avoid the volatility is to widen your stop. Not easy to do when you have a small account and you cannot afford a big loss. This is why trading capital is so important. This is why the use of leverage is so harmful to your account. This is why your emotions dictate your trades versus research and preparation.
Alright let look at the oil chart below. I called a short in oil around my levels and price patterns in the daily right. My entry is around the 51.20 area. I left my old lines in (which really mean nothing other than reference points) for your own information and I added where I expect oil to go next week. You remember that my target area was still the 43-44 area. It still is.
Now price ramped higher and it stopped me out. Plain and simple. I have done well up until that point but this was a clear loser on the first entry. No big deal. I exited around 52.80 even though this was a major rejection point. My expectations were for the market to ramp higher to get the weak shorts and then maybe turn. However it didn't. Shortly past my stop it turned and came back down.
Now I could have said "ok I am going to wait and lets see". That is what most traders do right or average down. Nope. I had my risk to reward levels ahead of time. Period. They were exceeded and therefor I am out.
Now you can see that I have a position. 8 lots or contracts.
Why?
The reason is simple. The area that I wanted to enter was either going to be a support for a reversal or a continuation down. As it turned out it headed down. My reason was that the price bounced from the obvious secondary trend line and this would cause traders to add to their longs. So where are the new stop areas? Right. At around the 43-44 area or lower. My theory is that price will move down to here at least. Maybe lower. Fundamentally we already know oil is in oversupply. Not that this matters to price action but it is still a very crowded trade to the upside. Sure some weak longs were cleared by the majority of hedge funds are still there.
I am already nicely in profits but I suspect that the price is going after them this time. So I don't want to leave too much on the table.
So you see how you can reenter. Risk management is highly important as you know. In the case I am describing you can lose to win. That is how smart traders do it. Patience is another key. Most of my swing trade positions have been in small drawdown over the past month or so. However they are now nicely in profit. It took a lot of time. Therefor patience is very important along with where you get out if you are wrong.
If you are a newer trader you have likely asked this question quite a bit. You see something, you enter the trade, you are sure that you have done your due diligence and low and behold. The moment you enter price starts heading right for your stop.
Ever been in that situation?
I have many times. Many times I have watched price nail my stop to a tee and then head back down towards my target. A conspiracy right?
Not really. In the FX market it is more likely to happen to you this way because the market makers can make the market whatever they wish to make it. It is not so easy when you are trading a highly liquid market in futures like say Oil. The reason being is that with your one contract you are barely a blip on the radar. In other words you are so small in comparison to most of the market participants that for one contract or even two it is hardly worth the risk to try to come after you.
What happens more times than not is you get caught in the volatility which is the battles between the bigger players. They pound the market back and forth looking to keep price at a certain level. This battle is pretty powerful especially in the more liquid times like say the US open.
The only way you can avoid the volatility is to widen your stop. Not easy to do when you have a small account and you cannot afford a big loss. This is why trading capital is so important. This is why the use of leverage is so harmful to your account. This is why your emotions dictate your trades versus research and preparation.
Alright let look at the oil chart below. I called a short in oil around my levels and price patterns in the daily right. My entry is around the 51.20 area. I left my old lines in (which really mean nothing other than reference points) for your own information and I added where I expect oil to go next week. You remember that my target area was still the 43-44 area. It still is.
Now price ramped higher and it stopped me out. Plain and simple. I have done well up until that point but this was a clear loser on the first entry. No big deal. I exited around 52.80 even though this was a major rejection point. My expectations were for the market to ramp higher to get the weak shorts and then maybe turn. However it didn't. Shortly past my stop it turned and came back down.
Now I could have said "ok I am going to wait and lets see". That is what most traders do right or average down. Nope. I had my risk to reward levels ahead of time. Period. They were exceeded and therefor I am out.
Now you can see that I have a position. 8 lots or contracts.
Why?
The reason is simple. The area that I wanted to enter was either going to be a support for a reversal or a continuation down. As it turned out it headed down. My reason was that the price bounced from the obvious secondary trend line and this would cause traders to add to their longs. So where are the new stop areas? Right. At around the 43-44 area or lower. My theory is that price will move down to here at least. Maybe lower. Fundamentally we already know oil is in oversupply. Not that this matters to price action but it is still a very crowded trade to the upside. Sure some weak longs were cleared by the majority of hedge funds are still there.
I am already nicely in profits but I suspect that the price is going after them this time. So I don't want to leave too much on the table.
So you see how you can reenter. Risk management is highly important as you know. In the case I am describing you can lose to win. That is how smart traders do it. Patience is another key. Most of my swing trade positions have been in small drawdown over the past month or so. However they are now nicely in profit. It took a lot of time. Therefor patience is very important along with where you get out if you are wrong.
No comments:
Post a Comment