What I would like to do in this short article is to give you an overview, looking at the strategic level, of how I trade with my favorite setup, which will be the one that will be referenced in most of my website analysis. We are talking, ‘the big picture’.
Too many people make a critical mistake by focusing exclusively on their entry triggers and trying to enter on every occurrence of that signal, without ANY consideration of where that trigger occurs within the overall market structure.
Too many novice traders spend too much time stuck in this learning stage. They discover a new trigger, and part of their mind gets excited thinking that they may have found the holy grail of trading. It doesn’t matter if it’s a 10/20 EMA crossover, or perhaps a MACD crossover above zero, with stochastic rising and RSI above 50. It’s NOT the holy grail. It’s just an input trigger.
The fact is:
* The market structure tells you where to trade.
* Entry triggers tell you when to enter and exit your trades.
Focus first on defining the market structure and then find a trigger.
Let’s say, for example, that our entry trigger is a candlestick reversal pattern… in this case, a bullish engulfing candlestick. Where would you find the highest probability trade?
Would it be at the top of a long rally, where the bullish engulfing pattern pushes straight up at overhead resistance?
Or it is the higher probability trade where the Bullish Engulfing pattern shows that a major support level has held and significant upside potential is still available from the entry point to a projected target at the upper resistance level.
It’s exactly the same entry trigger, but obviously the market structure tells us that the second entry is the higher probability trade.
REMEMBER: The structure of the market (in this case, Support and Resistance) tells you where to trade. The trigger tells you when to enter or exit.
Now, the structure of the market does not need to be just support and resistance. YOU need to consider, ‘what is the reality of price action as you see it? What do you think makes the price move?
Take a look at a series of graphs… What do you see?
Is it perhaps a framework of support and resistance levels that defines areas of stagnation or price reversals in the market?
Do you see a “rubber band” type of concept, with the market reaching extremes and then returning to the central mean or moving average? Moving back and forth between the upper channel line, the center line, and the lower channel line.
Do you see swings? Higher highs and higher lows, lower highs and lower lows, with momentum spikes in between?
Define how you see the big picture of the market movement. What do you see when you look at the graphs? What is the market structure? And only then should you look for an entry trigger that gives you a low risk and/or high probability trade within the context of your big picture.
So what do I see as the reality of the price movement? How do I trade? What is my strategy?
Well, in this short article I can’t get into the tactical level, I can’t talk about my entry and exit triggers, and trade management strategies. It would take an entire book because it’s not just input or output based on a simple indicator. It is based on price action, on understanding the nature of price movement. It takes a long time to develop, and it’s something I’ll cover on my website in much more detail.
However, for now I can share a very broad overview of my concept of strategic level trading. At least my favorite anyway.
The reality of price movement for me is supply and demand. And that supply and demand leaves traces that can be read on a price chart.
All price movement, all turning points, and all support and resistance areas are a function of the balance or imbalance of supply and demand.
In particular, the key areas that allow low risk or high probability entries are areas of support and resistance.
I trade within a support and resistance framework.
I define all major support and resistance based on a higher time frame, and then look to profit from the move between these areas on a smaller time frame.
For me, my markets of choice are stock and currency indices. The longest time frame to define major support and resistance is an hourly chart, and the trading time frame is 1-5 minutes.
The strategy works with other markets as well, because it is based on the reality of price movement. And because the markets are largely fractal in nature, you can adjust the time frame to suit. Let’s say you want to trade on the daily charts, then you only get your biggest support and resistance on the higher time frames, be they weekly or monthly charts.
Therefore, major support and resistance areas are placed on the chart, and I am looking for low risk or high probability trades (depending on my entry triggers as defined in my trading plan), go long off major support or go short greater resistance.
And for the price movement between the major support and resistance?
If it’s an uptrend, I look for low risk or higher probability entries in areas of minor support.
If it is a downtrend, I look to short low risk or high probability entries against minor resistance.
And if it is a sideways trend, my goal is to identify low risk or high probability entries at both minor support and resistance.
One key point for all entries though: it must be a low risk or high probability entry, depending on the criteria clearly defined in my trading plan.
So there it is… Sounds simple when viewed from this high level overview. However, the reality is that it is very difficult. The statistics of failed traders show this clearly. Success requires a long period of time. Whether it relates to my view of the markets, or you prefer some other method of defining market structure, spend a lot of time watching price movement. Learn to ‘read the tape’ as it used to be called, internalizing the patterns and flow of price movement. It takes time. Be patient and accept the challenge.
Stop blindly inputting on every occurrence of your input trigger. Remember:
* The market structure tells you where to trade.
* Entry triggers tell you when to enter and exit your trades.
happy trading