Learn Wyckoff methods to learn about supply and demand.
This chart does not contain a volume plot. Volume is the most important factor.
That high range up bar just prior to your short entry shows high demand in the absence of volume figures. Even without volume information, that high range up bar wiped out most of the quick down move which is a good signal that prices are going higher.
Another concept: If you want a really good dinner, do you go for fast food or to a sit down restaurant where time is taken to prepare your meal?
High price range moves in a short amount of time are not quality price directions, they are meant to suck you in. In fact, high price range moves in a short period of time are more climactic than anything and washouts.
Anyhow, learn to use volume, supply and demand to get a fuller picture of what's happening. Read the tape !
If it hasn't been said the markets are probablistic in nature. If you have done homework on this setup you should arrive at a rough win percentage. Nothing works 100% so get the idea of right and wrong out of your vocabulary. Most likely you haven't done homework on this setup in which case you shouldn't be trading it unless you like to gamble. Homework includes developing an exit plan.
The following user says Thank You to YertleTurtle for this post:
This is the risk of trading lagging indicators, if I were trading this, I'd look for price action to confirm or reject the zone you've identified, you'll clearly earn less by waiting but most critically you won't be caught on the wrong side.
After getting burnt in similar situations in the past, ask yourself would you rather miss the move or get it wrong and be down capital.
The following user says Thank You to sands for this post:
I agree that you just follow your rules. Some trades work out and others don't. You really did trade a valid supply zone (Sz). You had what was called a level on a level. There was a supply zone formed on 12/31/14 (1819 to 1824) that had only one touch with a wick. You can see that that was the one the market reacted to and dropped for a good potential profit. Usually the more distal level of a level on a level is the one to trade for a more conservative approach. But an aggressive trader might well have taken the trade you did and swallowed the loss and moved on. Few would had had the patience to hold on after entering the upper supply zone on 1/15/14 and waiting until 1/23/14 for the big move down. But that is position trading. The low of the move was 1700.75 on 2/05/14. 1778.75 which is 50% of the previous swing would have been a conservative target. You could have taken some profit there and then held a portion (assuming you had a multiple contract position) using technical stops of previous swing highs and got out at 1766. Even then you would have left a lot on money on the table. The only way to have captured anymore on a disciplined basis would have to use a ballistic stop on a lower time frame for the large leg down on 2/03/14. That is 20/20 hindsight and I don't think I would have thought of it/seen the opportunity/or done it.
That zone had been tested/visited numerous times so they already picked up all the sellers orders. That is what let it go bullish from that zone. Fresh zones are more likely to hold true through another touch.