Romancing the Stop and other Price Action Fables
Trading Thoughts and Ideas
By; Kenneth Lee
Disclaimer
As always very few of any of this is a novel
idea of my making, just my interpretation of
ideas and facts I have learned over the years and
staring at charts until I was blind.
If anyone feels I have encroached on any of
their proprietary information please let me
know and I will edit or remove. This is being
made for sharing on public forums not as a
money making endeavor.
Plus also remember trading is a lonely
profession and each person is responsible for
their own trading decisions. Everyone has their
own ideas of what is a good or bad trading idea
use this information to build your own Ideas.
Thanks Ken Lee
FOREWARD
In my time trading I have seen many people with
issues similar to these that they have found hard to
overcome and most never get past and finally decide to
give up trading.
I have decided to try and put some of my own trading
thoughts down on paper . One to remind myself on a daily
bases of what are in my opinion the most cost effective
aspects of trading. Or the things that can allow a person to
move forward in the trading game.
The title Romancing The Stop , Is probably based on
the most important of any one single trading issue that is
abused to the detriment by more traders than anything
else. The Stop position.
Moving a stop, adding to a loser to move a entry.
Those things will keep a person from becoming a real
trader every time.
I will also put some of my personal thoughts down of
what I look for as to direction and my personal entry
ideas. Again this is just my own thoughts based on
information gathered over a decent amount of time from
various sources
Romancing The Stop
The one single aspect of trading that will make you or
break you is using stops correctly. They will preserve your
trading account equity as well as build your confidence in
your own trade plans.
The first and foremost thing a stop does is provide
control for rule number;
1. Always have enough equity to take the next trade.
If you can't take the next trade you are dead in the
water and will have to wait to save more funds to try
again. Plus it is a devastating blow to the ego to have that
feeling of a total loss . Most people can't take to many hits
on their personalities before they decide that this isn't for
them .
Those that keep fighting the good fight can also build
a wall of indifference between themselves and their
trading . Making it sorta alright to continually fail, but
neither idea is acceptable. We are all in this to at the very
least add to our financial situations and better our life's .
Plus your personality will start to suffer and then you can
start to blame out side things on your trading. Blaming
your family and friends or your other job. Which can
lead to self destruction.
So we must learn to love where we place our stops and
realize they are our guardian angels, That we control to
protect us from us. I hear so many people blaming the
market or the charts on why a trade goes bad , but in
reality we have no one to blame but ourselves.
The choice of entry style has less to do with being a
successful trader than does knowing where to place a
realistic stop. I watch a few newbies trade and analysis
their charts and at times one of the most basic faults is
the use of a preset stop loss. This is the stop you set on
your platform to automatically be placed with your entry.
The use of that should be nothing more than to get
your stop on your chart so you can then adjust it to the
correct location. To correct that issue change it from say
15 or 20 pips to 150. Then it is so far out of position you
have no choice but to adjust it. Plus within your trading
plan you should have a price number already picked to
where it should go.
Here in the title Picture we have two demand levels or
one that is now being tested for the second time. But we
can clearly see where our stop should be placed .
The only thought we have in our minds when we take
a trade is the fact we are only taking it because we think
with the given information we have used to plan our
trade that the price is now going to go back up. Our
choice of stop location should support that choice.
We can see that the stop is below both levels giving us
the best chance for a move back up. But it wasn't meant to
be and we got stopped out. But that is good as we WANT
to be stopped out if we are wrong because that is why we
put it there.
There is a lot on that chart above that was saying that
short was the direction that price was going , But another
one of the major failings in trading is trying to turn price
when everything is saying otherwise. It doesn't matter
what you use to enter , A set of lower swing highs , a
supply level that is holding and been hit lower and lower
just the opposite of one that is going to break. Or even
nothing more than a trend line. They all show the same
thing, Price is going to drop lower.
But in the overall idea of trading it was more
important that we placed a stop in the correct place than
that we be right in picking the right direction. Because
even if we don't have the best record of picking good
entries we will be able to pick some more since we
preserved our equity.
So we now know it doesn't matter as much as our
entry style. The true key is to know where we should place
our stop and then try and get the best entry possible
which would be the one closes to that stop. That limits our
risk because then price has to move against us less to hit
our stop that preserves more of our equity to trade
another day.
On the below chart which is a 4 hr we can clearly see
where we want to place our stops the top or bottom of
each swing high or low. So once we have these stop
locations picked it is then on us to find the best entry as
close to them as we can to limit our risk.
I have said this a million times your choice of entry
style should be what you can SEE. In the beginning none
of us knew which way price was going when we looked at
a chart. I have always tried to compare learning to see
entries to driving a car . You can put it all down on paper
but it is nothing compared to being out there on the road
doing 75 mph trying to remember it all at the same time.
Plus just because we now know where stops should go
we can even eliminate those which we see as being
irrelevant or against our trading plan direction.
I personally love the swing highs and lows to pick
direction then add Supply and Demand levels into the
equation and it serves me well as my primary way to plan
a trade. I don't forsake other basic trading ideas either
such as retraces (Fib) long wicks (Pins) or patterns
( descending or ascending triangles , flags). But with time
you start to come to the realization that most of those are
nothing but Supply and Demand levels in a picture form
after the fact. Other s may call them support and
resistance, or where buyers or sellers are entering the
market , but the main key is what you can use to get your
entry as close to your stop as possible.
There is no better feeling than getting that spot on
entry with little or no draw down . Plus those are the ones
you should always try and hold for a home run as great
rejection right off the entry is a good sign of the best
choices.
I have looked at a few different trading strategies over
the years but they all had the underlining idea of trading
price action. They all had great merits, but some were to
limited in their types of entries not enough. Others had to
many with different rules for each. But overall they did
work.
But I guess the one thing I took away from them all.
Was the fact that the guys promoting them were making
massive gains not off all the quick intra-day entries they
were showing , but from longer term trading ideas that
really required not much explanation but more
commitment to believe in your choices.
Plus they tended to trade using a stop as not only a
way to protect there initial risk but also as a profit taking
tool as well. Say looking at that 4 hr chart we get a entry
off one of those levels then each time it breaks another
swing we move our stop up to below the new swing. We
will continue to make gains until it reverses. If it should be
a flier we could make a massive gain in just one trade.
Even those trying to follow trade levels given, found it
hard in the holding part. This is something I have had to
deal with myself and am now just starting to get a better
handle on. But it still comes back to loving our stops and
using them more as a overall trading tool than just a thing
to despise. As that attitude will not get us far.
So let us look at using a stop as a over all trading tool.
We can see in the below chart we have almost 20 hrs to
find a entry within that level at the top. So as we believe
that price is going down. Once price moves to our first
counter demand level. These are the places if price was to
turn around it would. As each level is broken we see a new
supply level formed. When price moves away we can then
move our stop down to where it would be if we were to
short again at one of these new supply levels after a
retrace.
This is one of the hardest parts of being a great trader
holding a trade when you or sitting on a large gain. But as
you can see if you held thru those 2 demand level breaks
the trade was awesome.
So we can see how massive gains can be achieved by
using a stop as a overall trading tool and in the process we
will start to view our stops differently. Not as proof of our
failure to pick a correct trade entry but as the true reason
we are successful at trading.
This doesn't mean we can't take profits when we see a
reason to. But I would suggest SUGGEST, that if we enter
on a fast chart at least look at the next slower chart for a
target, which would be the opposite level. Example you
enter on a 30 min chart then look for a TP level on the
1hr or even better the 4hr. My trading has greatly
improved by just moving from a 15 min chart to a 30 min
as the levels I look for are further apart. So it goes to
figure that a 1 hr or 4 hr will provide greater gains as well.
The best traders I know do one of two things . One
they either enter using a fast chart such as a 15 min then
hold for 4 hr or even daily level. Their risk is small using
the fast chart as a entry and their gains are huge. Yes they
don't hit a homer each time . But they also know when to
take the gains in a ranging market.
I was in a skype room with a group of guys we didn't
trade the same at all each using different ideas, it was just
to keep company. But I did see something that gave me
thought for pause. Some of these guys would take entries
and move their stop to Break Even very quickly maybe
after a 10 or 15 pip move.
I watched one day as a guy got stopped maybe 7 or 8
times but never lost a cent. Maybe even made a few pips.
But then finally his entry was at the right spot and he just
let it run and made about 250 pips. The key is that he
wasn't looking for a small gain he was looking for the
right entry to the right move a large one.
So in summary enter as a intraday trader or scalper
but hold for the levels on the longer charts.
Then there is style two, Those that can scalp as well as
trade longer term. It always amazes me one I see some
that can enter a position based of daily or 4 hr charts with
huge stops of even hundreds , then in the same day trade
fast charts with tight stops of 15 or 20. but their key to
success is that they adjust the trades accordingly. The $$
risked is the same based on the stop position distance. But
it is a rare trader that can keep their mind straight to pull
that off.
So where does that bring us. To the fact that to risk
less we should look for the major levels to take trades but
if we can look for entries on the faster charts . I personally
like the 30 min chart for my entries . It is smooth enough
without loads of noise. Noise is just the up and down
movement of orders being filled . The longer term the
chart is the more the chart smooths out not leaving
confusing patterns to have to digest.
So we have two charts. The first is showing the 4 hr
level and stop location. Yes it could go higher and test the
top but the long red candles that dropped from it makes it
very good to me.
Then we have a 30 min chart looking for the best
entry we can find as close to that 4 hr stop as possible. We
can see 2 possible entries one Sunday night then the other
Monday morning. I have marked the opening price on the
chart I will use this as a trading level as we can see right
below it how price dropped away. I don't hold a lot of
power to Sunday night levels staying within their
parameters as they are formed during low volume times
and we can get a drift in or out of a level that will snap
back in when larger orders start to enter the market.
But of course the best entry was the highest , closest to
the 4hr stop. Right after Sunday open for most 6 pm
eastern U.S. , a test of the Friday high supply level, These,
I call flips where price flips over from one direction to the
other. Think of a swimmer approaching the wall he twist
around getting in to position then he pushes off towards
the finish line. The large move down is when he uses his
legs to push off getting away from the wall.
So we can see how using the faster chart we have
entered a trade risking less of our equity, but this doesn't
mean we have to limit or perspective of our possible gains.
So let us look at how differently the take profits would
look on the different charts. First we will look at the 4hr.
We can see the clear difference that removing some of
the noise can provide. This the 30 min chart.
So what does this tell us. Number one is that we
shouldn't get tunnel vision, Just because you may watch a
faster chart for better entries or more entries. To not use
all your charts as a complete guide is a bit fool hardy. We
after all are in this to make money. And we can leave a lot
on the table by not watching them all.
So in summary we can clearly see how using a stop
limit as a different type of tool can change our perspective
on it and make it more a friend than a foe. There is a so
much psychology about why we have self destructive
behavior but we all see it all the time personally . The girls
that keep dating the mean men. Or the drug users. The
people that can't control their anger or emotional wrecks.
Over eaters the list is huge . But they are all based on the
same ideas. We build electrical connections in our body
that HAVE to be filled . So it is hard to change these bad
habits, but the good news is they can be changed .
But the key is forcing ourselves do do things that are
uncomfortable because they are going against the
connections we have created. Just as when you quit
smoking it gets easier and easier each day until finally you
break that cycle. Sure you still may have a desire to smoke
but now you can control it.
In most cases with our trading the difference between
screwing up and doing well is a millisecond of time so all
we need is a bit of control to think the right thought at the
right time. That is where a plan comes into it.
If you have thought out your trades ahead of time you
have already planted the seed to do the right thing. Almost
all my REALLY bad trades come from shooting from the
hip not thinking things out and just jumping in. A lot of
times I can find myself doing what I call trading against
myself. This is where I took a trade against my own bias
for a pair the being the alpha male I can't admit I am a
moron and get out. There is no place in trading for ego
when it comes between you and your trades. The
computer or charts could care less about us and our
ignorant behavior.
The sooner a person comes to grip with this fact the
faster they will move into the realm of pro trader. The
difference I see between professionals in any field and
amateurs isn that ability to do the right thing at the right
time. Even a great athlete knows when to take a loss for
the team . Or a lawyer knows when to take a settlement or
does he stick it out and loss more by fighting a losing
battle, or a contractor in a upside down job, might be
better to pay any penalties and bail out.
But what I am saying there isn't a profession I know
of that doesn't benefit from accepting a loss from time to
time and the professional is the people that can see an
realize that.
In trading we have the best chance to become rich
than any other type of endeavor because it is one of the
few things that all our risk is upfront. But if we are just to
hard headed to use the best tool we have we deserve to
just struggle and slowly drive ourselves insane. How many
people in any business would love to have all their risk
upfront and locked in knowing they would never lose
more than they setup.
I don't remember who it is but someone has that
attached to their avatar , “ Insanity is doing the same
thing expecting a different outcome”
So learn to embrace your stop and see it for what it is
your guardian angel put there by you to protect yourself
from yourself.
Then make the commitment to change your own bad
habits and think your entries thru before you leap. But
mainly think about your stop or your risk per trade. That
is the only thing really important.
A profit target is a good thing but you can trade very
successfully with out one , but not a stop. Some of my best
trades happened because I had a computer or internet
issue and I couldn't close a trade and when I got back up
and running I had made more than if I had closed.
I am going to go ahead and convert this to a pdf and
try to add to it later .
Cheers Ken Lee
