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Quite logical and i understand the rational behind it but where do you place your limit in terms of retracement. It's easy to say sell strength like when we have a potential for a double top formation but during a trend and more particularly when price makes an attempt to break the trend, how do you differentiate a simple pullback from an attempt to reverse and change the overall bias considering your heuristic rule: "sell strength, not weakness" or vice versa. If you are heavily loaded when price makes an atempt to reverse then you don't want to give it all back.
The simple answer to this is - you never know and you can NEVER be certain.
Still there are things you can do. If the market has moved up and is pulling back, the single best method to guage the end of the pullback is the tape. If you trade forex - good luck with that. The tape will slow down, large sellers will disappear and you may also see firming up on the DOM OR lots of volume hitting a small bid yet price not ticking down.
Whether you use this method, whatever your 'in' is - consider that this 'pullback' from an uptrend will do one of 3 things:
1 - Continue up and carry on the uptrend
2 - Move up and then fail
3 - Move straight down
You should look at how far you are from the last swing high - if it's not far enough to at least get 1 target off or to a break even, then pass on the trade because you might get back up there and sellers jump back in.
If the last swing high is closer than the pullback low because you hesitated, pass on the trade because you are in an unfavourable position.
Get in close to the pullback low - by analysing order flow.
Ensure the last place that the price stalled is far enough away to take money off the table by the time you get there.
Ensure your stop is closer than that first target/last swing high.
With futures it's tough - contracts ain't cheap for the small guy and so I think trading the ETFs as a proxy allows the retail trader to work with position size/scaling algos he'd not be able to use with futures contracts.
Still - my current model is to have:
Target 1 - 50% of position - 4 points NQ, 2.5 points ES
Target 2 - 25% of position - next swing high
Target 3 - 25% of position - opposite end of range but managed (e.g. if buying yesterdays low, target = yesterdays high)
Stop - Same as Target 1
This way if I reach Target 1 - it's s free trade. Target 1 must,must ,must be a price that has been traded before though. There can't be anything in the way of it.
Of course, I am an amateur, you may consider that there are different levels of amateurship though.
What I wanted to show: range bound areas identified by the Dual Supertrend indicator matched short term overbought conditions identified by an oscillator (yellow areas on lower panel). The arrows indicate entries based on a confirmed resumption of the trend. Confirmed by the SuperTrend means a downward volatility breakout, confirmed by the oscillator means divergence (as opposed to convergence) of the moving averages.
Confirmed signals will always be late and may not be the best signals for timing entries. Actually there are three possible ways to reenter on retracements, options refer to a prevailing downtrend:
(a) enter short at resistance without confirmation by price
(b) enter short after a lower close has been made
(c) enter short after confirmation
My worst experiences have been made with (a), as any S/R leve can be simply ignored. With (b) and (c) you enter the train at least in the current direction, which is consistent with statistical findings that two consecutive price moves have a slightly positive correlation.
Whether (c) is a valid entry depends on the position of price relative to the prior low, as typically this needs to be tested to allow for rejection of the current hypothesis that price is in a downtrend.
The last two entry signals were too close to the prior low, so they were similar to potential breakout trades. You may as well conclude that breakout trades are amateur trades. I think this is true, if you are close to the end of the trend, but not at the beginning, when volatility is still rising.
The trend is your friend, until the end, when it bends.
Your account value is $100,000, the ATR of the ETF is 3, and the ETF trades at $100. You set your risk at 2% of your capital on any given trade - $2,000 in this case. And you choose to use a 2 ATR stop. Using these risk parameters, you are willing to allow the ETF to fall by 6% before getting stopped out. 20 period ATR X 2 ATR stop. We now have the absolute value of our stop, which is $6. Divide the 2% risk capital ($2,000) by $6 and we get our position size of 333 shares.
Now, if you want to add to your winner, you can add units of risk at the appropriate technical points, or in 1/2 ATR increments. Your “adds” gets the same risk management treatment as your initial position. You can allow yourself 4 units total risk per trade which would be putting 8% of your capital at risk.
This may be a little rich, so if you want, you can adjust your risk downward.
You should always ask yourself before adding to a position, "Would I initiate a trade from this point, if I didn’t already have this position on ?
Not in the strictest sense. My trading is a little more visceral, in the sense I can guesstimate from experience, how to size my trades. But the general concept forms the framework for my trades.
