Uncertainty and Trading Success: The Discretionary Ruled-Based Plan 2

Yesterday, we determined what was necessary to arrive at a strategy: whether to go long, short or stand aside.

Today,  we look at what we need to consider to enter and manage a trade.

The first consideration for initiating a trade is the price zone for entry. Deciding whether we’ll go long or short, plays a role as does the type of structure.  For example:

The chart below shows a sideways structure. So, I’ll be looking to go long either:

• at the Primary Buy Zone; or
• on a breakout above 2916.40; or
• on a retest of the breakout at the Primary Sell Zone

I’ll look to go short:

• at the Primary Sell Zone; or
• on a breakout below 2864.70; or
• on a retest of the breakout at the Primary Buy Zone

In the above example, the sideways structure determined the zone. Similarly, in the chart below, the enclosed area is in what I call an R3 trend mode i.e. you won’t see retracements on the daily chart. To find a zone, you will need to chunk down to an intra-day timeframe, e.g. the 60-min.

In the same way, our setup and entry techniques are governed by our style of trading. As a rule, there are two entry types:

1. Responsive (buy dips and sell rallies)
2. Initiating (breakout buy new highs, sell new lows).

For the responsive trader, he wants to see evidence that a zone will hold, and that the current direction is exhausted.

For example, if I were buying at the Primary Buy Zone, I’d want to see:

•  a neutral, contraction bar – usually the open and close are around the centre of the day’s range, and
• a bar with less than a  normal range (black arrow). Some traders would enter on the contraction bar.
• Others would wait until the high of the contraction is breached to enter or wait until they see a bullish-conviction bar (yellow arrow).

More tomorrow