Fear and Trading

I was teaching a small class on “soft stops”. By that I mean:

• Anticipating, before entry what I expect the market to do, and
• If the expected does not happen,
• Whether or not exit.

We were looking to take a trade in the EURUSD. The key question I asked myself when taking a trade is whether I’m entering a rotational market or a directional one.

With a rotational market, we are looking to sell highs and buy lows. The soft stop is determined at the end of the day. With a directional market, we are looking to sell new lows and buy new highs. The soft stops are based on intraday activity. (For me, usually the 60-minute chart).

The chart above shows the entry for the class.

The high for the day at that stage was at the 50% level of March 7’s range. The ATR for the EURUSD is about 80 pips. When the pair attained the day’s high, it had done 34 pips. So, I was looking for more downside.

We waited for a retracement and went short at 1.12405.

The idea behind the trade was the market was going to form a new leg down.

As you see from the chart above, we managed to sell the low of the move.

After entry, the market retraced. When the pair had the strong rejection buying and selling extreme, it indicated we were likely to see a rotational day. Because we entered on a directional assumption, the trading plan called for an exit of the position. We could always look to sell around the high of the day, thus improving the entry.

What is interesting is that over 1/3 of the class decided to remain in the trade; some are still in the trade. The next two chart show what happened after the exit.

The chart above shows that after exit, the pair dipped and then rallied. So, the assessment of a rotational day proved correct.

In the chart above, we see that the pair formed a” neutral day, within a bearish context”:

• The body of the candlestick is roughly in the middle – no buying or selling conviction
• The close below the open, some buying conviction.
• Today’s daily bar did not provide a trigger bar. Also…..
• The day’s range is below average.
• Also, given that it follows Friday’s bullish bar, and
• Given that today we stopped at the 50% retracement of Thursday’s bar,
• The next move is probably down.

Taking all of the above into consideration, I’d exit any trades taken today and re-assess the situation tomorrow.

The chart below shows the candlesticks that form my trigger bars:

More tomorrow.

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