Pullback Trading: 5 Things to Look for Before You Place a Trade

Discover pullback trading secrets that work you so you can better time your entries and improve your winning rate.
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9 Lessons from trading coach Mandi Rafsendjani – Trading Podcast

In our latest podcast (click for all episodes) we talked to Mandi Rafsendjani and we went really deep into trading psychology, the mindset and how traders can become successful.

Below the video, I compiled the 9 most insightful take-away messages that I got from talking to Mandi.

1. Fill all your buckets

The best traders lead a balanced life and do not derive their self-worth from trading alone. This will help you push through hard times when your trading results are not what you imagine them to be.

Make sure that you have a supportive social environment, look after your family, surround yourself with people that add positivity to your life. Take care of your health, do sports and fuel your body with good food. Have hobbies, try out new things and explore your interests. Feed your mind with good books, inspiring conversations or challenge your world-view to broaden your horizon.

 

2. The importance of feedback

The best traders can take feedback. The market will humble you and will give you harsh feedback on a weekly basis. Your coach will have to point out flaws and critique the way you do things.

The average losing trader will usually not be open to feedback and close themselves off.

Pay attention to how you deal with feedback and how it makes you feel when someone/something challenges your way of thinking/doing. You will learn a lot about yourself.

 

3. Understand your trading method in the market context

Most traders have no connection to their trading strategy and they just view it as a set of abstract rules that they need to follow.

The best traders understand what their trading strategy is trying to accomplish and under which circumstances it works best.

 

4. Your programming will influence your trading

Our values and beliefs shape the way we engage with the world, how we deal with setbacks, how we think and what drives us.

Our families and the inner social circle is what shaped our beliefs and values and, thus, it’s so important to look back at where we are coming from. Understanding the past, the motives, worries, goals and ideals of our parents/family will help you understand why you have been raised in that specific way. This will also help you understand yourself on a much deeper level once you understand why/how you react to specific circumstances the way you do.

 

5. Just because you read it in a book, it doesn’t mean you will be able to execute it

Reading books is important but without applying the knowledge, it’s pointless.

You can read about the importance of cutting losses and letting winners run all day long but if you do not experience it in your own trading, it won’t matter. And it won’t become a part of you.

 

6. Successful traders think strategically / solution-focused

When faced with a problem or an obstacle, do you complain or blame someone/something else? Or do you roll up your sleeves and look for solutions?

When confronted with a problem, the best traders ask themselves: how do I fix this? 

The average trader says: Why does this happen to me? 

Always look for a solution instead of trying to put the blame on someone/something else. The problem won’t just go away.

 

7. The best traders can recover quickly

The best traders are not trading without emotions and they experience all emotions. But what’s different is that they will pick themselves up quickly and (as we discussed in point 6), look for a solution right away.

Thus, don’t be too hard on yourself when you screw up – it will happen. But recognize that it’s up to you to turn things around.

Take full responsibility for everything that happens.

 

8. Know your strengths/weaknesses and leverage it

What are you good at and what are you not so good at?

Are you creative and like to test new ideas and explore how you can tweak your strategy in different ways to improve your edge?

Or are you an analytical person and work best with rigid rules, frameworks and a fixed routine?

Don’t try to blindly copy another person just because you see some level of success. Every person is unique.

 

9. The importance of the growth mindset

In our podcast with Dr. Steenbarger, he said that the number one predictor for success is curiosity.

And as Mandi rightfully pointed out, curiosity and the growth mindset go hand in hand.

Try out new things, get back into the beginner mindset and experience how you can get better at a new skill.

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Day Trading vs Swing Trading – What’s The Difference?

Day trading and swing trading are two strategies worlds apart. Know the difference, and don’t assume it’s just a matter of trading frequency and time.

Every trade or investment is based on the same precept: buy low and sell high. That’s the one thing that ties together day trading, swing trading, and long-term position trading. But aside from this one precept, each style has enough differences that a trader specializing in one might find himself completely unfamiliar with the other.

But how different can it be, really? Isn’t it just a matter of ramping up your trading frequency, going for shorter profit targets, and limiting or expanding your trading duration? Yes, it is. And by virtue of those three things, day trading is a completely different practice from swing trading.

If you’ve tried both, you probably know that day trading isn’t swing trading sped up, and swing trading isn’t day trading slowed down. If you switch domains without changing your approach, you might fail to maximize your opportunities. If you’re not familiar with the differences, then read on–that’s what we’re going to cover here.

So let’s dive in, starting with the first, and often overlooked, factor: volatility.

 

The Smaller the Scope, the Greater the Volatility

If you’re a high-frequency day trader aiming for small profit targets, say five to 10 ticks, you often have to take larger positions to make your ticks worthwhile. How large a position you should take depends on many factors, but let’s save that for another discussion.

Suppose you’re trading anywhere toward the end of the rectangle at [1]. You go long. Suddenly, at [2], the YM spikes. You were shooting for a 10-tick profit, but the spike measured at 138 ticks!

In just one bar, the average volatility jumped up from an average of 12 ticks to 138 ticks–in short, a 1,050% spike! In short time frames (in this case, the 5 minute chart), such percentage jumps in volatility are common, and you have to be ready to handle them.

 

YM August 7, 2020 – 5 Minute Chart

In daily bars, a 1,050% volatility increase is very rare. But it’s common in the smallest time frames. So, if you had a fairly sizable position, and if you were “short” instead of long, such a spike can take a big chunk from your trading account, if not wipe you out altogether.

Remember, in short time frames, volatility and noise can be much more significant than in larger time frames, for which you probably would hold smaller positions in a more “stable” volatility environment.

Let’s take a look at the same day but from a swing trader’s perspective:

 

The day we observed using the 5 minute chart is designated by the red arrow in the chart above. It was a relatively uneventful day from a swing traders perspective.

The context as shown in the daily chart appears much less noisy, allowing the swing trader to execute a “cleaner” trade. The setup is quite simple:

1. As YM continued to trend upward, you might have expected a “measured move,” calculating the top and bottom of the first swing at [1], a total of 1,770 points.
2. Let’s suppose you entered at the breakout of the swing low at [2].
3. Taking a measured move approach, you would have added 1770 points to the bottom of the swing low, setting your profit target at [3] which is at the price of 27651. Simple and easy, right?

But can’t you lose money swing trading in the same way that you can day trading? Of course. But at least you don’t have to deal with frequent swings upwards of 1,000% on a regular basis.

In fact, such volatility is rare, as you can see below. The chart illustrates the March COVID-19 crash. It was a deep plunge, but it also took several weeks to happen; it didn’t happen in a single day.

 

The Cost of Missed Trading Opportunities

One of the most obvious key differences between day trading and swing trading is trading frequency. Day traders can trade multiple times intraday, while swing traders can keep positions open for one to multiple days.

The cost of missing a trade can be substantial–either missing out on a big winning trade, thus lowering your overall returns, or missing out on a big losing trade. But since we do our best to limit our downside by placing trades with favorable reward-to-risk ratios, adequately sizing our positions, and using stop losses in addition to loss limits, we’re more worried about missing a winning trade that might have significantly raised our overall profitability, rather than a losing trade whose negative return could have been capped by virtue of a stop loss or loss limit (risk management strategy).

The more you trade on an intraday basis, the easier it is to miss a trade (think: bathroom break, phone calls, kids, meals throughout the day, etc.).

Here is a simple scenario. Imagine four trades on a given day, two are winners and two are losers. Your losses are capped at -50 points, while your profits, though uncapped, are aimed at double your loss amount, or 100 points.

What might happen if you miss one trade, given this 2-to-1 risk/reward scenario?

• Take all trades, you finish the day up +70 points.
• Miss trade 1 (a winner), you are down -30 points.
• Miss trade 2 (a winner), you are up only 20 points.
• Miss trade 3 (a loser), you end the day +120 points.
• Miss trade 4 (a loser), you walk away with +100 points.

With your losses capped in the scenario above, you can see that the most negative consequences occur when you miss the winning trades. You can’t predict which trades are going to end up winners or losers. So if you have a strong system, and if your reward-to-risk ratio is favorable, it’s best not to miss any trades at all.

Now, this is a very simplistic example, but it does a clear job explaining our main point.

What about missing a swing trade? The cost of missing a swing trade can be equally harmful. However, the chances of missing a swing trade can also be less likely. If your swing trade has a longer trade span, say a day or more, it’s harder to miss simply because you might have plenty of opportunities to enter the trade even if you missed the initial entry point (time is even more forgiving for long-term positions which last weeks to months). This may shave off points from your potential profit (or loss), but since your profit target may be days away, you might still have a chance to enter the trade relatively early on. In contrast, day trades can have a much shorter trade span, from seconds to minutes–miss your entry, and you may miss a large chunk of your profits or losses.

The main point here is that the cost of missing trades can be significant and that the likelihood of missing trades is greater for intraday trades than it is for swing trades that span multiple days.

 

Converting Demo Performance to Live Performance

Here’s a quick note on converting demo to live performance, as this is typically what beginning traders do to measure their readiness for a live market. Let’s try a simple thought experiment (though you’ve probably already done this yourself using a demo and live account).

• You make 100 demo scalp trades, all aiming for short profit targets of a few ticks, and you succeed in most of them, yielding profitable results.
• You “demo” trade (on pen and paper), 100 long-term position trades, say in the stock market, yielding profitable results at the end of the year.

Which profitable “demo” scenario is likely to have produced similar results in a “live” market? The second one, of course. Since demo trades can’t accurately simulate the supply/demand forces of a live market, the shorter your time frame for trades in a simulated environment, the less accurate your results. For instance, you may not get filled in an ultra-short term scalp; your slippage may be horrendous; and compounding trading costs can quickly erode your profits or add to your losses.

In contrast, when demo-trading a longer-term position, the forces of intraday supply/demand are less of an issue, making your simulated results more aligned with your live results.

The main point is that if you’re looking to jump from a simulated market to a live trading scenario, the longer your trade span, or the larger your profit target and stop-loss, the closer your simulated results may be to reality. Scalpers who attempt to convert demo to live often get burned right away; only then do they realize how different the live market is from a simulation.

 

A Tactical Versus Strategic Environment

The narrower your trading timeframe, the more “market noise” you have to deal with. If you’re scalping the market, chances are you’re trading a lot of noise, looking for quick “tactical” setups to exploit near-term supply and demand which may or may not have a meaningful connection to the larger fundamental forces shaping the market.

Whether it does or not, your primary concern would be tactical rather than big-picture “strategic.” For instance, take the Emini Dow Jones (YM) on August 27, 2020. Below is a 1-minute chart that presented us with two scalping opportunities before the market started trading sideways in the late morning.

Let’s annotate these hypothetical trades blow by blow. In each example, you’re trading one contract:

[1] You go long on an upside breakout from a rectangle formation.

[2] The breakout appears to be false, as you get stopped out (-58 points)

[3] Another breakout occurs, and you go long again.

[4] Following a traditional tactic, you take profit (+93 points) at 100% of your formation (as measured by the top and bottom of your rectangle).

[5] A broadening top occurs and you go long again at the breakout.

[6] You take profit (+69 points) at the distance equivalent from the top and bottom trendline.

You end the morning with a total market profit of 104 points, or $520–not bad for one day.

 

Now, how might you have approached this scenario from a swing trading perspective?

Let’s suppose you were using a 1-hour chart for swing trading, Here’s what a more strategic scenario might have looked like:

You noticed that both the S&P 500 and Nasdaq have been reaching record highs throughout the week. The YM has not, but it’s correlated with the other two indexes, driven by bullish sentiment.

The upward trend leading up to the first trade is a small technical indication, yet it sets up a clear context for the trade, for which your directional bias is upward.

[1] The Jobless Claims report is positive but muted–not quite meeting consensus but showing fewer jobs lost than last week. You buy one contract, expecting the Dow to advance.

[2] For safety, you set a stop loss below the trend line. You are waiting for the opening of Federal Reserve Chairman Jerome Powell’s speech at 9:10 am ET, which the market expects to be supportive of sustaining low-interest rates.

[3] Powell’s speech calls for sustained easing, with a goal to “overshoot” the Fed’s inflation target of 2%. This is bullish for the market as low-interest rates usually are..

[4] The US home sales report delivers a blowout; also positive news.

[5] The market responds by selling off, but over the near-term, the two reports are generally positive, so you expect markets to recover, as it subsequently does. You move your stop loss to below the most recent swing low.

[6] It’s now the next day, and the YM has been hovering above your last stop loss. The personal income report was muted but favorable. But it’s also Friday, and you’re not sure you want to hold the positive over the weekend, so you close and take profit upon failure for the price to match its day highs.

 

You end the swing trading session with a profit of 341 points of $1,705.

 

Do you see the difference not only in the length of trade and points gained (or lost) but also in approaching the markets tactically vs strategically?

 

Differences in Trading Time

Can you handle sitting in front of your computer waiting for trading opportunities day in and day out? It’s one thing to sit at your desk working on a project, say for work. It’s quite another thing staring at your trading screen paying attention to most, if not all, of the nuances in market movement.

Day trading not only requires more focus, it’s arguably much more exhausting than swing trading. Many swing traders work off the daily charts. This gives you plenty of time to analyze and execute your trades. It can also be less stressful–you set your risk and profit scenario, and you let it play out. If you swing trade the one-hour charts, then yes, it’ll take more time. But it’s still relatively less stressful than watching your screen for hours on end, every single day, hoping not to miss a trading opportunity.

Since swing traders are focused on the bigger picture, they’re less burdened by second-to-second changes in the market. They’re able to use technical and fundamental tools to identify potential opportunities in a timely yet less-rushed manner. Day traders who often and willingly engage supply and demand at a “noise” level can’t afford to miss a trading opportunity, whether it has lasting significance in shaping the market or not. It’s a “be quick or be dead” mentality. It takes lots of more time, lots of more focus, and the price of your time and energy investment ought to be worth it, otherwise, you’re taking on more risk, more frequently, for a payoff that may or may not be worth the cost. So think long and hard about this and try both before dedicating your focus to either one.

Listen to our podcast: What is the best timeframe?

 

Focus, Research, and Experience

As we said early in this article (and it should be evident by now), day trading is NOT swing trading slowed down, and vice versa. For example, just because you’re trading the same chart pattern (say, a symmetrical triangle) in either scenario doesn’t mean that the difference between the two is in scale or frequency. There are major differences in the market’s “time” environment which require a difference in approach. Let’s go deeper and look at both approaches as something of a “discipline”–one requiring its own unique level of focus, research, and experience.

Remember that successful day trading or swing trading requires time, repetition, and the experience of both success and failure. Developing an “edge” in either case requires dedication; something you can’t achieve unless you master one or the other (at least in the early stages of your trading career).

For instance, there’s a certain level of tactical flexibility and time in-flexibility that day trading requires. If you’re trading a scenario that’s noisy, you might have to switch your setups because, after all, the event you’re trading–ultra short-term supply and demand imbalances–may be occurring at the noise level. This differs in swing trading, where your trade setup may be based on a larger supply and demand scenario, or on fundamental data or expectations.

There’s an inflexibility with regard to day trading–namely, you can’t afford to leave your screen for too long, as you may miss a trade. In swing trading, you don’t necessarily have to be at your screen once your trade has been planned or executed.

Swing trading may require near-term fundamental analysis in order to get a strategic view of the context. Day traders just have to know when big events are happening (i.e. FOMC announcement, GDP report, etc.). But beyond that, day traders are masters of minutiae–and the more skillful ones can make a living trading small and sometimes insignificant market fluctuations.

In short, the difference between day trading and swing trading goes much deeper than just timeframe alone. Both are completely separate disciplines that have their own requirements and their own rules of engagement.

Ultimately, deciding between the two depends on your own personal tendencies with regard to physical and mental stamina, reflexes, risk tolerance, capital resources, and emotional inclination–in short, your personality.

 

Capital Requirements May Vary

There are varying requirements for different asset classes and markets. For instance, if you’re interested in day trading stocks, you’ll need a minimum of $25,000 to be a “pattern day trader” without being penalized. In the case of equities, swing trading may be more suitable, especially if you don’t have an extra $25k to add to your account.

This isn’t necessarily the case in the futures market, though you have other funding challenges to consider. Competitive day trading margins can allow people to day trade contracts such as the emini S&P 500 (ES) for as low as $400 per contract, but to hold a position beyond market close, as swing traders often do, you may need upwards of $12,000. Not many traders can afford that. Fortunately, the CME now offers “micro” emini contracts–a tenth of the exposure to the standard eminis–so that an equivalent contract (MES) would require only, say, $100 to day trade and $1,200 to hold “overnight.”

In addition to capital requirements, another thing to think about is whether you can afford to trade at the frequency at which you plan to trade. For instance, we know that trading costs (commissions and slippage) can eat away at your profits and add more to your losses. In light of this fact, can you afford to day trade, say, five times, ten times, or twenty times or more a day without depleting your trading account? Something to think about.

 

The Bottom Line

Day trading and swing trading are two separate disciplines whose differences are to be found not only in their respective markets and time frames but also outside of the trading window (stamina, research, capital requirements, and everything else we discussed above).

Before you decide on one and the other, be sure to give it plenty of thought, and perhaps try your hand at both in a live market (simulations don’t really count at this stage of the game). Ultimately, it boils down to your personality and which style resonates with you the most. Be honest with yourself and capitalize on your strengths first before buffering up your weakness. In time, you’ll find what’s more natural to you, and once you do, that’ll be the start of your path toward successful trading.

In our Masterclass, you get immediate access to both – one swing trading and one day trading strategy. We provide the exact rules and the framework and you can test which one fits your personality and thinking.

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Breakout Trading: 5 Things to Look for Before You Place a Trade

Discover how to identify high probability breakout trade and avoid false breakouts (90% of traders don’t know this).
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The 13 Best Candlestick Signals

Candlesticks are the foundation of any price action chart. And although I do not recommend to trade candlesticks blindly – because their predictive power is not strong enough – when combining candlesticks with other confluence factors of technical analysis, a trader may improve the odds for determining the right price direction.

 

How to use candlesticks?

There are dozens of use cases for candlesticks but the one that we found to be most reliant is to use a strong candlestick signal to determine your higher timeframe bias.

For example, if you find a strong candlestick signal on the Daily timeframe, you can establish a directional bias for the lower timeframes and use the candlestick information as a trading filter.

This works extremely well and helps traders pick the direction for their trading. In the following, we will show you how to determine the higher timeframe bias with the 13 case studies we prepared.

During our masterclass courses and webinars, we also pay close attention to candlestick analysis and we dive even deeper into price action trading. If you are interested, make sure to have a look:

Tradeciety’s Masterclass Program

 

 

#1 Candle Deceleration

I have been talking about the deceleration concept for a while and we teach one multi-timeframe trading strategy that uses this approach in our masterclass as well. It’s a super-powerful candlestick formation that helps to understand the change of momentum during a long trend.

During the long uptrend, you suddenly see a small Doji candle and then a strong bearish candle. This sequence indicates that the buyers are not as strong and that the price is high enough for the sellers to come in.

Most importantly, the deceleration pattern is best traded during a strong and overextended trend. The longer a trend goes on, the higher the chance of seeing a reversal back to the mean – especially in the Forex market which is considered a mean-reverting market.

Once a deceleration pattern has been identified on the higher timeframe, the trader may drop to the lower timeframe to look for trades in the direction of the deceleration pattern.

 

#2 Deceleration-Continuation

The deceleration can also be found as a continuation pattern.

In the example below, the price was in an uptrend and during the correction phase, the corrective wave gave a deceleration pattern: Bearish candle – Doji – Strong bullish candle.

This pattern indicated that the bulls are reclaiming the trend and that a continuation is likely.

Continuation patterns are best trades early on during a trend because the likelihood of a successful continuation is higher.

 

#3 Engulfing Reversal

The engulfing candle is very versatile and we will observe multiple engulfing candle scenarios during this article.

In the example below, the engulfing pattern happened as a reversal pattern. The bullish trend had been going on for a while and the engulfing pattern indicated a shift in momentum.

The large, red engulfing candle is significantly larger than the previous bullish candle. The bearish candle is also the largest bearish candle that was observable during the whole uptrend.

Such a significant change in candle size should always get the attention of traders because it indicates a major shift in the buyer-seller dynamic.

 

#4 Engulfing Continuation

Engulfing candlesticks can also be used as a continuation signal.

The price had just broken out of the range to start a new downtrend when the price gave a short corrective wave. The price always moves in ways and during corrective phases, it can pay off to look for continuation signals.

The two bullish candles were small in size, indicating that the bulls were extremely weak and could not get the price higher. Suddenly, the trend continued with a bearish engulfing candle. The break-away with the engulfing candle signaled that the bulls have withdrawn and that the bears are now continuing the downtrend.

As indicated above, paying attention to candle size during a trend and corrective waves is a great way to improve your chart reading skills.

 

#5 Engulfing Pullback

Did I say that the engulfing pattern is extremely versatile?

In this example, I used a 50 EMA as a trend-following tool. The price was always above the EMA, indicating a bullish trend. During a bullish trend, traders should look for buying opportunities.

The best pullback opportunities usually exist when the price moves back into the moving average and then provides a strong signal. Keep in mind that trading the touch of a moving average is not enough but by adding multiple confluence factors to your decision-making, the chances for picking the right direction may increase.

When the price hit the EMA in the example below, the price also formed a strong engulfing candlestick pattern. The correct wave, at this point, had been going on for a while and the pullback then offered a much better price for the buyers to get into new trades.

 

#6 Double Top Fakeout

The fakeout pattern is also often referred to as a trap candlestick pattern but the idea is the same.

In the example below, the uptrend made a local high initially and during the next attempt to continue the trend, the price failed to reach a higher high. The price was immediately rejected as soon as it reached the previous high.

This pattern is a clear indication that the prevailing trend is likely to be over because the buyers lack the power to continue making higher highs.

 

#7 Triple Tap Exhaustion

The triple tap is a powerful reversal pattern as it indicates a loss in trend momentum.

The price in the screenshot below made three weak higher highs after an extended uptrend. Each push at the top become less strong, the size of the wicks had increased and the candle size decreased. All those confluence factors indicate that the trend may be losing momentum.

The triple tap, like all other reversal patterns, is best traded during/after extended trends. The longer a trend goes on, the higher the likelihood of seeing a reversal.

 

 

#8 Engulfing Double Bottom

Did I say that the engulfing pattern is extremely versatile?

Whenever you see a double bottom after/during an extended trend, it indicates a loss of trend momentum. The sellers, in the scenario below, were not strong enough to continue the downtrend. The price was so low that it became increasingly interesting for the buyers.

The double bottom was finalized buy the large bullish engulfing candle. The significant size of the engulfing candle made this scenario even more powerful. Such huge momentum shifts indicate a significant change in the seller-buyer balance on your price action charts.

 

#9 Engulfing meets Fakeout

Did I say that the engulfing pattern is extremely versatile?

In the chart study below, the engulfing candle also showed the characteristics of a fakeout. The price was in a sideways consolidation and the breakout occurred with a large engulfing candlestick which also has a long wick to the upside. The wick indicates a failed attempt to move higher and the large bearish candlestick body shows that the buyers have withdrawn completely.

The engulfing candlestick is the largest bearish candlestick that was observable up until this point.

 

#10 Tweezer

A tweezer candlestick pattern is made up of two candlesticks with equally long wicks. The tweezer indicates a move in the opposite direction of the candlestick wicks.

In the example below, the tweezer occurred at a key price level too. When you look to the left, you can see that the last bullish trend was initiated right at the tweezer price level too. Such trend origin levels often provide great trend-trading opportunities if enough confluence factors are present.

The tweezer also occurred after an extended downtrend – making the bullish reversal even more likely. Thus, you can see how we can stack multiple confluence factors in our favor.

 

#11 Egulging + Pinbar + Triple Tap

Did I say that the engulfing pattern is extremely versatile?

I mentioned a few times that the more confluence factors you can stack in your favor, the better your price prediction usually becomes.  In this chart study, we have multiple confluence factors that indicated the potential end of the bullish trend and a bearish reversal.

• The bullish trend had multiple trend waves and was extremely over-extended
• The triple tap pattern shows weakening bullish continuation trend waves
• The engulfing candlestick shows a strong bearish push at the third triple tap
• The wicks show signs of a tweezer pattern – further indicating a rejection at the highs

All signs were pointing towards the end of the uptrend. Once you identify the confluence factors, you may go to a lower timeframe to time your entry in the direction of the potentially upcoming downtrend.

 

#12 Pinbar Deceleration

Once again, we can stack the confluence factors in our favor to end up with a powerful price analysis.

The chart was in a strong uptrend on the left. But the second trend wave was much shorter than the first one. Any momentum indicator will signal a divergence.

The bullish candles decrease in size before the price printed a pinbar with a long wick. The long wick is a strong reversal signal. Following the pinbar, a large bearish candle occurred. This pattern indicates the deceleration of the uptrend and then the acceleration of the new downtrend.

 

#13 Inside-Outside Reversal

Let’s end with an engulfing candlestick pattern, shall we?

Just as in the example above, the price was in a weakening uptrend. The trend wave leading into the final top was significantly shorter than the prior trend waves.

At the top, the price first made an extremely large bullish candlestick. However, the next candlestick was only a short inside candle which indicates stopping momentum. This is not enough to say that the trend may end but it’s another confluence factor.

After the inside candle, the next candle was an engulfing candlestick, showing newfound interest from the sellers in the market.

 

Candlesticks are great! But only with confluence

Candlesticks can provide a lot of important information about what is going on on your charts. But trading candlesticks alone is not recommended because the predictive power may not be high enough.

Stacking multiple confluence factors on top of each other to come up with a strong price analysis may improve the odds of finding the right trend direction significantly.

When it comes to confluence factors, let me summarize the most important ones once again:

• Trend wave analysis. Reversal candlesticks are best found after extended trends. Continuation candlesticks are best traded early on in a new trend.
• When a trend is showing signs of fading momentum, reversal candlesticks may succeed more often.
• Location matters! When a candlestick signal occurs at a key resistance level, your odds may increase even further.
• Candle size matters! Extremely large candlesticks show stronger momentum-shifts.
• When multiple candlestick signals can be combined, signal quality may increase too.

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The Truth about Copy Trading Nobody Tells You

A group of researchers did a study on Brazillian day traders between 2013 and 2015. They wanted to find out how many % of traders made money consistently. And do you know what they found? 97% of them lost money 0.4% earned more than a bank teller (about $54 per day) The top trader earned […]
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3 Ways To Overcome A Series Of Losses

On Monday October 19, 1987, the Dow Jones Industrial Average fell by more than 500 points. As the stock markets in Europe, Asia, and the United States began to crash, some traders, like Paul Tudor Jones, were able to profit from the fall out; others, like Richard Dennis, lost everything.

Dennis, who was a world-renowned trader throughout the 80’s and 90’s, blew through $10 million in less than 24 hours; by the end of 1988, he had lost a total of $50 million on the stock market. With a business to run and very little money to spend, Dennis could have easily given up on his career as a commodities trader.

But the mastermind behind Turtle Trading was ready to recover from his losses. In the book Market Wizards: Interviews with Top Traders, Dennis shared his approach to dealing with a series of bad trades.

“There is another point that I think is as important: you should expect the unexpected in this business; expect the extreme,” Dennis explained. “Don’t think in terms of boundaries that limit what the market might do. If there is any lesson I have learned in the nearly twenty years that I’ve been in this business, it is that the unexpected and the impossible happen every now and then.”

Like many of our readers, you may be searching for ways to recover from the unexpected. The practices that helped traders like Ray Dalio, Jesse Livermore, and Richard Dennis bounce back from failure can set you up for success in the 21st Century. Here are three tips for overcoming a series of losses, based on trading psychology, scientific research, and the experiences of the world’s greatest traders!

 

# 1Become A More Resilient Trader

When your decisions lead to a series of losses, you may start to doubt your knowledge, skills, and abilities as a trader. But the secret to overcoming a financial setback is your mental stamina, not your knowledge base.

According to Dr. Carol Dweck, a psychology professor at Stanford University, the most resilient students, athletes, and entrepreneurs have a growth mindset.^[1] When they face new challenges, they choose to work harder, develop new skills, and improve their current abilities; when they struggle with failure, they see their setbacks as an opportunity to grow stronger.

There are so many ways that you can cultivate a growth mindset, but one of the best tools at your disposal is available on this website! In our masterclass, we included a complete trading psychology course with tons of video lessons and helpful workbooks: Tradeciety’s Masterclass

 

#2 Change The Way That You Approach Your Trades

Of course, a winning mindset can only get you so far; when you suffer from a series of financial losses, you may also need to change your trading strategy.

According to Investopedia, a trading strategy is a method of buying and selling in markets that is based on predefined rules used to make trading decisions.^[2] In other words, a trading strategy is a process that sets you up for potential financial success by trying to achieve a positive expectancy.

Thus, the next step is that you sit down and become very clear about your trading strategy. 4 steps that will help you get there are:

• Print screenshots of your 10 best and your 10 worst trades
• Identify things your best and worst trades have in common
• Create a checklist based on your findings from the 10 best trades
• When you take a new trade, make sure it fits your checklist criteria

 

#3 Get Out Of Your Own Way

When your emotions take over, you may not have the ability to respond to losses with the same strength and resilience that you had before. Sometimes, the best thing that you can do to recover is to get rid of your emotional attachment to trading.

No one knew this better than Victor Sperandeo, the President and CEO of Alpha Financial Technologies, LLC. Like Paul Tudor Jones, Sperandeo made millions of dollars during the stock market crash of 1987; he later said, “The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more people making money trading.”

If you feel like your emotions are getting in the way of your future success, you should find a way to channel that energy into something positive. Short periods of repetitive, physical activity — like walking, jogging, or yoga — can help you take your mind off of your past performance, concentrate on your next task, and sharpen your focus. When you get back to your desk, you can work on the next series of trades without carrying the emotional baggage from the old ones.

 

Are You Ready To Get Started?

What are you going to do to recover from a series of losing trades?

Share your thoughts in the comments below!

 

^[1] Mindsetworks. (2017). Decades of Scientific Research that Started a Growth Mindset Revolution. Retrieved from https://www.mindsetworks.com/science/

^[2] Chen, J. (2019, April 30). Trading Strategy Definition. Retrieved from https://www.investopedia.com/terms/t/trading-strategy.asp

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