Mailbag

Hi Jamie.

Say you are looking for a set-up and plan to enter on a break of the high of the entry candle and place your stop one cent below the low of the entry candle. As you flip through your watch list, you come across a great set-up that just formed and price action is currently on the next candle. What if price had broke the high of the entry candle before you noticed it and is now down below the entry point, but still above where your stop would have been?

Example.

High of entry candle: $20.35
Low of entry candle: $20.00

Next candle has gone up to $20.39 but is now at $20.25.

If you would have had your buy stop order @ $20.36 entered on time, you would already be in the trade. But considering you aren't, would you enter at $20.25 anyway and be happy that you are following your rules but are getting an even lower risk entry? Perhaps you would even buy more shares than planned with the lower risk? Or would you recommend placing a buy stop at $20.36 and wait for the price to climb back up to the intended entry point?

I often am busy looking at other charts and find myself in this situation when I load the chart with the good set-up. Half of me thinks I should wait until the price climbs back up, whereas the other half thinks I should get into the trade at a bargain price.

Thank-you for any advice.

-Nathan

Hi Nathan,

Here is an example of ADS (15 min.) which gapped up on Friday. After failing to take out the ORH, it retraced and made a move back up. At point A it started forming a solid base above the rising 5 period ema. At point B it attempted to BO but failed and pulled back.

If we drill down to the 5 min. time frame, I would not recommend buying in the area of point C at a better price. Once price pulls back, there's no guarantee that it will recover. The best place to enter is point D at the original buy stop price. In the ADS example we have a solid trigger bar at the original intended entry price. If this is not the case, for example, if the base is choppy, it might be better to wait until the high at point B is taken out.

If I miss an intended entry, I like to see how the next candle closes on the lower time frame. This usually gives me a good idea if the BO is a failure, or just a false start. If we look at my ESRX trade from Friday (5 min. chart below) and assume I missed my intended entry at the red arrow. We see that the next bar retraces above the PP (blue line). We also see that my stop is not taken out and that the next two candles print long bearish upper shadows. These two inside bars are weak so it is safe to enter on a break of the pink line, which is basically the intended entry point, or we can again wait until the green line segment is taken out. Either rule would get the job done. The bear flag above the pink line implies lower prices to come.


Hope this answers your question.