Trading The Right Way

Trading should be about practicing safe trading methods, and making money a side effect.

When price made a consolidation level, you would ultimately see a break out.

The break out would be of 2 steps: a pick of a direction and then the break-move that would go undisturbed until reaching an unfinished business level (i.e. an extension).

The important give away here is that the market would show you the direction to proceed in before hand.

In this first example the market upon having reached a high level of consolidation,

  1. makes the opening move
  2. retraces back to the starting point (and a little bit beyond)
  3. makes the break

In this second example the market upon having reached a high level of consolidation,

  1. makes the opening move
  2. retraces back to the starting point (and a little bit beyond)
  3. makes the break

In this third example the market upon having reached a high level of consolidation,

  1. makes a move in the wrong direction
  2. makes a larger move in the opposite direction that also turns out to be the wrong direction upon encountering the extension
  3. returns to the starting point

One thing that can be pointed out immediately is that those first moves that were made in the direction of the future break were larger than 60 pips from the consolidation level, whilst the move in the wrong direction stayed below 60 pips.

Now we have another high charge, but neither of the first two attempts have reached 60+ pips distance, they got to 49 and 49 pips away from the consolidation level before returning to the consolidation level.

Are there any edges here, how could you have made low risk trades here?

You could have utilized the decision distance on the first push away: fade the first move away from the mean at 45, 55 and 65 pips distance for a move back towards the consolidation level. If the opening move went beyond 60 pips, aim for re-capturing only 70% of the way back.

Now let’s look at the hourly continuation divergence-breaks for a second to see if there is a similar theme to be found about how the market breaks out.

How did this breakout happen (eerily similar looks to the fluctuation maximum whip) – the sequence of the events was

  1. makes the opening move
  2. retraces back to the starting point (and a little bit beyond)
  3. makes the break

Of course in this case the break out only got to the end of the next support, and there were other warning signs such as the RSI2 squares: the first RSI2 reading gets the move going, the second winds it down – and there was a beat for a good measure. Yes, on the upside you are showing a starting RSI2 maximum (buying exhaustion).

The point to be had here is that for a safe entry wait until a continuation divergence break, then put a limit order 10 or so pips beyond the divergence point & get ready for a ride.

How? By utilizing the Free Trade concept. Once you are in gains, you put a protective stop loss (perhaps a trailing one) at 1, 2, 3 pips beyond your entry – now you cannot lose on this trade.

For me, the auto trading on my desktop takes care of it all: I set the stop loss to code “2” for a short, and I would get locked in 1 pip after 4 in gains, 3 pips after 8 in gains and then beyond 20 pips the lock in gets pulled at 16 pips behind (1/2 fluctuation size).

I got stopped out with $20 gains right after I could had taken $90 and soon after there was an opportunity to take $140, yet I am happy with what happened: I haven’t lost anything and have dry powder to play the next pullback after the initial move. I practiced disciplined trading. I should had payed more attention to the limitation around the consolidation level (+- 50 pips) and cut the positions for optimum gain. But this is how I can shape myself up to perfect, low risk trades. By noticing the sequence, by acting on them and factoring in the possible obstacles.

The following image shows how multiple continuation divergences can be broken one by one. In this sequence the price came back by 35 pips beyond the break point, but if you only started buying 10 pips+ beyond, your maximum draw down would had been 25 pips, and there was at least 70 pips to be had.

Those 3 upper brown divergence lines got knocked out one by one.

As for sizing, your total risk should little enough that you could withstand a 60 pips move against you – the explanation was on this page earlier. They know well that most retail traders cannot take a 40-pip move against them, hence the fluctuation maximum is somewhere around 42-45 pips.

Below: see how you can use RSI2 in exchange for choppiness exhaustion readings. The (2) did not make it to a 98-read, it only reached 96, so that does not show.

This continuation divergence break, however minute it was, lived.

Cat A signals:
Extension fill (scale in fade)
Full Charge = Reset (no direction)
4H Exhaustion Beat + Forest (high base)
Aim: 80+ pips

Cat B signals:
Cover Longs + overbought Comfort Level (>70)
Cover Shorts + oversold Comfort Level (<30)
Cover Shorts + spike low
Cover Shorts + spike high
Beat of 2nd RSI2 square plot in the same leg
Beat of 15min stochastic bar + Forest
Aim: 60+ pips

Cat C signals:
Continuation divergence break (pullback entry, scale in, trail)
Aim: 50+ pips