Today we welcome Corey Rosenbloom from Afraid To Trade, as our Guest Blogger!
Please welcome him and take advantage of his vast trading knowledge.
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Good Morning Trader's Blog Members!
I'm very happy that Adam and Trader's Blog have given me the chance to teach you today.
Let's get to it...
Although we all employ different trading strategies across different time
frames using different vehicles (stocks, options, futures, etc), there
really are a limited number of pure trades we can take which provide clean
entries and risk-management points, and it is helpful to know the major
types of trades we are employing in our trading plan.
The four major types I propose are the following:
1. Breakout/Breakdown
2. Retracements
3. Reversals
4. Rangebound Fades
This simple chart I created helps illustrate these basic concepts:
1. Breakout Trades
When experiencing extended range consolidation, it is best to begin
considering playing for a Breakout in hopes of a new, sustained breakout
move. Recall that other traders will be attempting to “fade” the breakout
and if price continues, they will be forced out by their stop-losses.
Stops are placed conservatively just below the breakout zone or
aggressively below the area of most recent consolidation.
2. Retracement Trades
Retracements often have the highest probability of success when properly
identified (in a trending environment). Core trading strategies can be
utilized as well as swing trading strategies which seek to capture the
“sweet spots” or a simple 'leg' of price movement (these can be the
distance from a support zone to the most recent swing-high price). Stops
are placed conservatively below the support zone or aggressively below the
most recent swing low.
3. Reversal Trades
Although Reversals have the lowest probability of success, when they truly
occur, they can produce some of the largest profits if you capture near
the true reversal zone. Realize that calling tops or bottoms is a losing
game if you do not press your edge when the trade goes in your favor
because your win ratio will be so low. It is generally not a good idea to
fade a dominant trend even if you suspect a trend change due to a
potential price climax or exhaustion. When fighting a trend, you must keep
tight stops.
4. Rangebound Trading
Finally, Rangebound or Fade-Trades occur when you have identified a
rangebound, consolidating market with clear support and resistance
boundaries to provide profit targets and close stop-loss zones (just
outside the often parallel channel lines). This tends to be profitable
until a breakout occurs, in which you could endure large losses if you
trade without stops. Realize that price expansion often follows
consolidation, as markets do not consolidate (or trend) forever.
Typically, traders find it ideal to identify one set of trades or trade
set-ups and play those whenever they recognize them, rather than trying to
interpret complex signals or varying your personal trading style on
perceptions of possible market behavior. In other words, it might be best
to identify which types of trades you are most comfortable executing given
your psychological and risk tolerance and then adhering to those
strategies instead of being tossed around by market action.
Keep in mind that these trade types are applicable to technical analysis
and short-term trading, but even fundamental analysts can benefit from
learning basic market structure, especially trend structure analysis An
ideal trade has a fundamental reason for buying which is supported by a
low-risk entry provided by basic technical analysis and the trend
structure.
In your own trading, identify which set-ups you take most often and see if
they fit into any of these above patterns. Learning where you fit in the
“Grand Game of Trading” can lift your confidence and give you that
psychological edge needed over the competition who is driven by emotion
and fails to study market structure.
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Corey
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Please learn more about Corey Rosenbloom, his strategies, and his analysis at his blog:
http://blog.afraidtotrade.com
If you have the time check out our other Traders Whiteboard lessons. We now have a total of eight lessons that you can benefit from and they're available here.
Adam Hewison for the Traders Whiteboard Series
