This is one of my habits – itching mouse finger getting tempted into shorts before they have setup. I have a system specifically designed to get into these kinds of trades so that I have a way of expressing this way of experiencing the markets. This should help me avoid temptation but sometimes the impulse overrides patience.
A fast move into a level while inside the Neutral Zone can be shorted directly at the level.
However, once the market has broken outside the Neutral Zone and price has accepted above or below a break out level, the setup needs to be much stronger before you can trade against such a move:
- There needs to be confluence at the level or one very strong level such as an unfilled gap or a weekly pivot.
- The market needs to have already shown some signs of reversal such as the two gold circles prior to the actual setup on the chart below.
- There needs to be a KL in the direction of the trade to act as a magnet and the trade parameters must allow at least 1:1 at that level.
- Anything less means there’s no setup.
Counter short-term or long-term trend?
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There is a huge difference between trading against a short-term reversal to the longer trend and trading against both the short-term and long-term trend. The former can be a very successful strategy and the latter is not advisable except at very strong 3Min Bolli setups (entering the trade at confluence and having a strong target for the market to go to for at least 1:1.
As Ken Medanic of Neurotrader says,
No-one ever got rich by being impulsive
(I am sure there are some lucky exceptions to this maxim, but trading ambition and impulsivity are absolutely not good bedfellows.)
If I enter the trade before it’s hit a level, there is a small chance I will be lucky but a much greater chance that the market will go for the KL to grab all the orders there. That is the market’s raison d’etre – to maximise trade. Market makers know the levels too! The impatient entry before the level is a retail entry for those with itchy mouse fingers.
Risk control
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With these trades, because you are trading against a strong move that has been accepted above key levels, it’s important to get the trade risk free as fast as possible, which I do by taking 70% of the trade off at 1:1. Once the first trade is risk-free, you can look for additional entries to build a position for the reversal.
