Sunday, 6 July 2014

What to do?

There may be a question in a trader's mind about the entry pattern when he perceives a good trade setup at the DP or a range as to whether to enter on direct breakout or on pull back.  He knows direct BO has odds in favor of failure and in case of pull back, he knows he may or may not get good pull back to enter and he may miss the trade if the prices just run away without giving a pull back. So the question is what should one do?

We all know direct BO's mostly fail.  Many a times there is a false break of BO point by a couple of points.  So if someone decides to enter on BO, then another question comes, how many points away from the breakout point?  1 point, 2 points , 3 points or more points away from the BO point/highest high or lowest low to avoid the false breakout.

Whereas in case of pull back, entry point is clear.  It is just a point away. But there is uncertainty.  We may get a pull back, we may not.

Today while doing a trade simulation on historical chart, I came across the same dilemma.  What to do?  In fact, few traders raised the same question in last few days.
Here is a chart, step by step...

The chart is from October 3, 2013.


Here, Nifty opens full gap up, above PDH.  So the bias is positive. Then the initial range gets formed.  I have taken both moves, first down and then up, to form an initial range.

Now we look for the opportunity to go long above IRH.  It could be direct BO entry or the entry on PB.  For direct BO entry, as a usual practice one would like to go long a point above the IRH and for PB entry, one would wait for it to happen.  Lets see what happens next...


As you can see, there is a false break of IRH by 1.15 points.  So If someone had put a trigger price about a point or less away, there are chances that it would have got triggered.  So now in the trade.
Lets see what happens after that..


You can see as most of the BO trades fail, this one also failed triggering a SL order 10 points below the entry.  It was a false break out and trapped the trader who entered on the BO.
So now we have only one option left and that is to let it break successfully and then enter on PB.
Lets first see whether it breaks....


Wow...it successfully breaks the IRH.  Now we can wait for a PB and then enter.

So now lets wait for the PB and see whether we get a PB or not...


Oh..no..it ran up to the target without giving a PB.  Missed the train...

After citing this example, now I pose a question to you.  What would have been probably done in this situation?
A) Enter on direct BO with a SL trigger order 1 point away from the high.
B) Enter on direct BO with a SL trigger order 2 points away from the high so as to avoid false break.
C) Completely avoid BO and wait for pull back and entry only on pull back.
D) None of the above.  A different trade plan.

What do you do generally on such setups?  Are you entering on direct BO in such setups?  Do you allow for some room to avoid false BO?  or you prefer only PB's and completely avoid BO?

Please kindly select your preference A, B, C or D and let me know your preference in the comments section below.  You can also give your opinion or feedback about the same.  After your feedback, if possible we will take this discussion forward and try to find out the ideal situation.

Thanks for your support in advance.

27 comments:

  1. Following are my comments on BO:-
    1. Range days come after a sharp rise day (100+ points). Do not take BO on such days.
    2. Do not take BO if today's IR is inside day (so far).
    3. If IRH is just 1-2 points below PDH, then keep BO at PDH as the SL triggers will happen.
    4. BO works well if IRH is higher than PDH.
    5. If there is a deep pullback or complex pullback, then I avoid taking the next BO and wait for BRB unless there is an established one leg of high momentum already done and we are taking the BO to enter second leg of momentum


    In your case, I would have taken the BO. Normally, I keep BO around 1 points higher (but at round figure). For example, if IRH was 5870.80, then I will keep BO at 5872.

    ReplyDelete
    Replies
    1. Vikram, All your comments make sense.....I am sure all experienced traders do what you done !!!!! In my case if i try any trade then only first breakout will try..rest of the breakout i wont try

      Delete
  2. An excellent post.

    Options A and B : how do you determine how much of a filter will keep you safe from a false BO? Is 1 point safe, is 2 points enough? What if you keep your filter at 2 points and then price reverses after you enter. With the same SL position, you have increased your loss by 2 points. Point is you can never be sure how much filter is enough

    So C seems to be a valid option.

    But I sometimes do take a BO trade. Three conditions I check :

    a) Is there a BOF of the opposite range boundary
    b) Is there a consolidation just below the BO levels, thereby accumulating some stops there.
    c) How many times has the price been at this point? If this is the third or more time, then chances of a BO are better.

    I look at these conditions and then decide whether or not I will take the BO.. In the given example, I would have probably missed the BO. There has been a BOF of RN, but is it convincing? There is no consolidation below the range high, and this is the 2nd time, the price has come to the range high location.

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  3. Hello Sir,

    Thanks for your info. Could you please let me know which chart or tool your are using,

    Thanks,
    Gokul

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  4. U R Dave Sir,

    Good post... much needed one in fact!
    I have little experience of DP trading.. 35 days so far.. but let me tell my views.

    I consider direct BO.. if below conditions met.

    1. If FTA is at least 10 points away
    2. If there is a possibility of good order flow from intra players & positional traders
    3. If any DP’s around BO location.. i consider to place order above/below DP levels.. instead of range levels.. it gives 2 layer protection..
    4. If i see any fluid move.. i dont miss BO trade
    5. Initial SL should not be more than 10 points
    6. In case of IR BO, i prefer to scratch trade.. if trade trigger & came back into range.. instead of waiting for initial SL.. most of my failure trades are during IR only.. but when they work, rewards are good.
    7. Last but not the least, location also important.. example, Friday BO of PDL

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  5. Location of BO with respect to market condition is very important what i feel. As market is in down trend for few days ( as in your case ) So positional / STBT shorts must have been already in the market. As market opened above PDH chance of them covering is high. Even then I won't take first BO above IRH as due to previous day market condition some people might try to short the market, so I will wait for pull back from IRH towards IRL. and place SL buy order nearer to IRL and also at 2 points above failed IRH. If this trade is executed i will place SL below new small IRL low.

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  6. Sir,

    We should let the extreme of IRH get tested once and wait for the close of the next candle to ensure that formation of swing high is completed. Now we can safely place an order 2 points above this swing high. If the price is not spiking up, within 2 minutes after triggering the order, we have to square off immediately, as there is not sufficient accumulation of orders.

    If we see more than 4 consolidation candles very close to IRH, we can place an order 2 points beyond the extreme, without waiting for the first testing. Again we have to exit immediately, if the price does not spike up within 2 minutes after triggering the order.

    It may not be out of place to mention what I have observed in case of Counter trend PP formations(even on the last Friday). After a steep fall/hike of 40 points or more, we have to wait for some time to let the price consolidate, before placing a CT order. How long we have to wait is some thing difficult to be quantified exactly. I have seen that when the consolidation high/low gets broken by a point or two or just tested, followed by consolidation for some time, we can safely place the order above the extreme. Now either price will go up or fall after testing or not testing the extreme, but we can safely assume that consolidation has ended.

    I would like to know whether my thought process is correct.

    Daveji, thanks for this quiz. Look forward to more such questions in the future on a regular basis.

    Thanks,
    S.Karthikeyan

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  7. Hello Sir,

    I got the info after reading few sections in your blog,,,,thank you very much.

    ReplyDelete
  8. Hi URD,
    This is a great exercise for improving our understanding. Thank you.

    My answer would be A. If I took the first breakout, I would have exited 4/5 points below and reentered long on the second breakout. I am not sure though if I would have gone for the first breakout.

    ReplyDelete
  9. Thank you all for your wonderful response.

    I personally would restrict direct BO to PP kind of formation and BO from a tight long range and keep some room of 2 to 4 points to avoid false BO. But even after taking this precaution still sometimes there is a false BO. Else I would wait for a good pullback to join the successful BO. If I don't get a good pullback, it would let it miss.

    If I miss an opportunity, I have nothing to lose. It won't dent my account. Only thing is that I could not make use of the opportunity.

    Market is full of opportunities. I will find another one.

    In the above example, as it is a good BPB of PDH/PDC, I would try to enter above IRH with some room.

    URD

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  10. Sir,

    Thanks a lot for the whole exercise. When there is a tight long range, will you keep orders at both sides at 2 to 4 points away from the extremes?

    S.Karthikeyan

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    Replies
    1. SK

      If it is in the middle of range and I am not sure where it would go, I would keep orders on both sides. Generally BOF of one range extreme happens. This would help us sometimes to know that it might break the other side.

      URD

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    2. Sir,
      Thanks for the guidance.
      S.Karthikeyan

      Delete
  11. Sir,

    Thanks for providing an excellent food for thought. As a regular visitor to your blog, I would like to furnish my two cents worth of comments.

    Since the initial bias of the trader in this example was positive, I would have entered long two points above IRH with SL placed below IRL, and this would have let me ride the BO trade after the complex pullback.

    Alternately on hindsight obsevation I opine, IRH should have been placed at the high of the first candle and this would have given enough confidence for the trader to enter BO trade with the candle before the BO candle closing in green around IRH.

    Regards,
    KSG

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  12. Hi Dave sir,

    Since IRH is above PDH and low risk trade i try BO trade with 2to3 point space and targeting BRN.

    Thanks
    Arun

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  13. Hi UR Dave,

    Till now i have not traded a single direct BO trade except cigarette pattern. Everyday There is a lot of BOF or BPB's. So i don't even think about BO trades. If i missed a big profit from BO trade, i don't care about it. This is my opinion. That is C.

    ReplyDelete
  14. Hi UR Dave,

    How are you getting data into ninja trader? I am finding a data provider for ninja trader. Give the details to get data into ninjatrader if you have.

    ReplyDelete
    Replies
    1. NPA Trader

      I am using ninja trader for trade simulation only as I like the look and feel of it and I can do nice bar by bar simulation.

      Nifty & Banknifty Futures Tick data in Ninjatrader format is available on google drive at http://tinyurl.com/NTFormatdata
      Here data is extracted from trading software and is not exactly tick data but still quite satisfactory for most purposes.

      URD

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    2. Thx URD. I am using NT for the first time. I have imported the data but am not able to get it into the chart. Can you point me to any which explains the steps? Appreciate your help.

      Delete
    3. I am able to create the chart. However this seems to be for the most recent series. I have 2 queries (Apologies if these are one too many and off topic):
      1. How do you open older charts? Are there some settings that need to changed in "Instrument Manager"?
      2. Does NT has a replay function similar to F12 that MT4 has? NT Support said that "Market Replay" will not work for historical data imported as .txt file.
      Thx,

      Delete
    4. Anon

      NT is much more complicated than other charting softwares I have used. You would have to go through their help section and google it. It took me too lot of time when I first created chart through Instrument Manager. Somehow I got the chart by trial and error method. I have not explored it properly since that day. I am just using it and inserting historical data into it. Thats all. So I would not be able to help you much.

      I will tell you how I open the chart. I go to file>new>chart. Here Nifty is listed under Default.

      For replay function, you would need market replay data. I don't know how to get that data. I do not have that. I use left and right arrow key to do bar replay, bar by bar.

      Hope this little information helps you. I would suggest you if you are comfortable with your older charting software, stick to it. Do not look for new one. It complicates things.

      URD

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    5. URD,
      Was looking for a charting software with data for backtesting. MT4 did not have data and icharts was not conducive to backtesting. With some trial-and-error and jugaad was able to import all data to NT. Had to change the data file name.
      Have included each month's data in a single file (for easy import) and uploaded the data with brief notes here: http://www.4shared.com/rar/w5Ts3vEuce/NT_Data_till_Jun_2014.html
      Hope this will be helpful to others.
      Thx for your help.
      DM

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    6. DM

      Thanks. Good to note that you ultimately cracked the NT. It is really cumbersome. Is it normal data or market reply data?

      URD

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    7. This is normal txt data for NF and BNF. Daily data given by rm sharma @ http://tinyurl.com/NTFormatdata has been collated into month wise for ease of import to NT. Market replay is not possible with this data.
      DM

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    8. URD,
      It is possible to simulate market replay in MT4. Details here: http://www.forexfactory.com/showthread.php?t=60849
      HTH
      DM

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    9. DM

      Yest. It is very much possible. In fact I did my all practice on the same tool. I am also planning to make a short video on how to set up 3-min chart on Strategy Tester to simulate market replay.

      URD

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