There are 3 basic types of entry setups that traders often use.
They are the Breakout, the Pullback, the Counter-Trend.
The important thing to realize is that you can attain identical Win/Loss Ratios on each of these OVER THE SERIES so one form of Entry is not necessarily better than the other – they are just different styles of entry based on repeating price movement patterns.
One type of setup can perform excellent on one day and poorly on another due to changes in market conditions. Breakout Entries can and do fail and get stopped out. Pullback Entries do fail and get stopped out. Counter Trend Entries do fail and get stopped out.
Let’s examine this further.
In a Breakout attempt the buyers or sellers attempt to bust price out of a level of congestion that it has been trapped in and if there is enough participation in the breakout we can see a direction price move begin, but there is not enough participation to overcome the opposition and the Breakout Fails, price can fail back into the range. We have a FAILED BREAKOUT which can lead to a stop out.
If we take a look at the Pullback setup where price typically pulls back to a level of support and is expected to bounce and continue in the original direction it was moving, we in fact will see and experience that sometimes price does NOT bounce as expected and keeps on PULLING BACK against our new entry to hit a full stop.
Likewise a Counter Trend Entry where we are attempting to play a natural Reversion to the Mean on a temporarily overextended price – we can get caught up in a run-away price move (Short Squeeze or Watershed Sell-off) and there is NO reversion going to happen any time soon, resulting in a full stop out against our position. (See Below)
The question often arises, WHICH SETUP IS BETTER TO TRADE? – Breakouts, Pullback or Counter Trend Trades?
The answer is one is not better than the other. They are different styles of entering the market and we can arrive at EQUAL failure rates for each of the 3 over the series. The important thing to keep in mind is that each type of setup lines up with different types of market conditions so one day may be conducive to breakouts and pullbacks but not counter trend entries. On other days Counter Trend entries may give the best bang for the buck.
The market can also shift behavior mid session.
We can debate Advantages and Disadvantages for each. For instance, pullback entries tend to look like they get you in earlier and many times they do, but most of these entries are taken AFTER a price move has been rejected and TURNED BACK from a certain level and has moved back into its own supply areas. You are basically engaging the market back in enemy territory and you are betting that the strength that caused the original move is going to COME BACK and cause price to bounce in your favor again.
With Breakout entries it may appear that we are getting in late, but instead we are WAITING for price to have the strength to ESCAPE OUT of the “Supply Area” it is trapped in first BEFORE placing our entries. We are betting on the participants who broke us out to CONTINUE in that direction.
In a Counter Trend entry we are going against the main momentum and betting on the fact that price very often overextends itself into unsustainable levels or runs in to barriers that will deflect it back to a balance area, i.e. a Reversion to the Mean.
Many times we see that Counter Trend Trades work great in sideways markets with lots of overhead resistance, but will have a high failure rate in Strongly Trending Directional market. Likewise, Pullback Entries can work great in smoothly trending markets that are zig-zagging following an upward angled support line, but can trap you in areas congestion if the momentum suddenly drops out of the market or you can miss entry opportunities altogether in a high-octane – super trending market that simply Refuses to Pullback during a hot run.
As I mentioned, Momentum Breakout Entries can appear to get you in late sometimes and lure you into a trade right before price fizzles, however momentum signals TEND TO CATCH ALL STRONGLY TRENDING DIRECTIONAL MOVES as we are playing horizontal boundaries and price ALWAYS has to cross the next boundary to continue in motion. So Breakout Entries are IDEAL for playing the TREND.
As a systematic Trader you should stay FOCUSED ONLY ON THE SIGNALS AND SETUPS OF THE STRATEGY YOU ARE TRADING and don’t worry about the missed opportunities from other setups. As I mention below, you don’t have to TRADE MORE to make more money, – ONLY INCREASE your position sizes over time on the trades you do take.
Dealing With Drawdown Weeks
As much as we would all like to be “Consistently Profitable” in trading – every week, every day, heck every trade… reality dictates otherwise. Understanding the concept of drawdown weeks is vital to your longevity as a successful Emini Day Trader. Just as the market itself goes through up and down cycles with price, volume, range, volatility, etc, so too your levels of trading profitability will go through up and down cycles. After a string of 3-4 high point scoring weeks in trading, you may notice that your system or strategy may hit 1-2 weeks of tough going and fail to deliver the gains you have become accustomed to. I call these “Drawdown weeks” because after a period of consistent profitability it’s suddenly payback time! You will notice how the graph below looks just like your typical stock chart in an up trend, with higher highs and higher lows.. and yet it is NOT a stock price chart, but a graph depicting the net point gains in Emini Day Trading per day. On the left you will see the drawdown week where you gave some back. Looks like the typical price pullback.
What Causes A Drawdown Week?
Lets assume we are working with a trading methodology that has proven itself week after week. What causes one of these drawdown periods to eventually show up on the radar? Although YOU could be personally responsible for the drawdown week due to sloppy/emotional trading, most drawdown weeks occur during, and are caused by – lousy market conditions. Yes.. there is a direct one-to-one correlation. The market could be extremely DULL or too VOLATILE that week making it extra difficult to navigate the trading landscape and come out ahead. We all know that when the market gets stuck in the doldrums, we see price action slow down, volume drops off, overall market movement gets choppy and to top it off strong trending action becomes a rarity making it impossible to catch runners. Many times the market will have just enough momentum to trigger us into trades, but not enough momentum for any decent follow-through, leading to a much higher failure rate with more stops getting hit. The bottom line is that the market conditions are just not conducive to making money no matter who you are.
Its All Relative To When You Start
The negative impact of a drawdown is directly related to when it occurs. Lets say someone presented you with a system that tested out with an 80% win rate.. sounds fantastic right? This means that after 100 trades you will have 80 winners and only 20 losers. So far so good… BUT… what if your 20 losers came all at once UP FRONT.. before you got to your first winner…? Could you (and would you) be able to handle the drawdown from not only a cash perspective but also an emotional one? Notice how in the graph above the payback week occurred after 2 weeks of healthy point gains, so the drawdown did not eat into your original capital, but only a portion of your “house money”. But had the drawdown period occurred the very week you flipped the switch and started trading your new strategy you would have run your account into the negative right off the bat making it difficult to continue trading the strategy. (This is the very reason we shy away from 1 week trials to our E-mini Desktop Alert Software – with your luck you could start your trial during a drawdown week and never get a chance to experience the full potential Automated System Trading)
How To Deal With Drawdown Weeks
The first and most important thing to accept is that drawdown weeks are a normal part of doing business as a trader and they do not necessarily mean your system is broken or that your strategy doesn’t work. Most drawdown weeks are the direct result of poor market conditions. Drawdown weeks WILL OCCUR so you better know how to recognize them and deal with them when they do. If for instance, the market has been stuck in a tight range on the daily timeframe, and you are 2-3 days into the trading week without any substantial point gains, you are probably experiencing a payback week. If you push too hard you will only make it worse. The best response to a drawdown week is to back off and let it pass by. You can reduce your position sizes, lower your targets, trade less the main thing is don’t be overly aggressive. You don’t want to allow your drawdown week to turn into a catastrophic loss in your account. Realize that eventually the market will run hot again and good trading action will come back with a vengeance. Your goal is to still be around when it does.
Moving Up To The Big Leagues
One of the secrets to make bigger money in E-mini Day Trading is getting yourself to a state of being consistently profitable using small positions sizes and then simply increasing your position sizes gradually over time. You don’t have to Trade More, you don’t have to incorporate fancier strategies, you don’t have to continue to integrate more complex indicators into the trading equation. Start small, build consistency sticking to a straightforward strategy that works, then slowly increase the number of contracts you trade.
Understanding The Concept Of Daily Max Drawdown
It is important that each trader have a specific Max Drawdown or Cutoff Limit. The Daily Max Drawdown Limit prevents overtrading in bad market conditions which can lead to catastrophic losses. If you think about it, we create max drawdown limits for each individual trade we take by using Stop-Losses orders. You can this of the your Max Drawdown Limit as a STOP LOSS for the Entire Trading Day. You can get stopped out on an individual trade and you can get stopped out from trading further for a given day. Just like stop loss placement, each individual trader will need to determine their personal Max Drawdown Limits. One methodology is to execute a minimum of 3 Trades per day (Win, Lose or Draw) and adhere to my “3 Strikes Your Out” Rule.
Successful day trading of the futures market requires a mastery and understanding of several important elements.
The trade starts off with deciding WHERE to attempt to get into the market. This is the beginning of the transaction (and extremely important) but there is more to focus on if you expect a positive outcome from trading.
There are two parts to the Entry phase
(1.) The Price Level
(2.) The Timing of your Entry.
After you are in the trade then equally important is how you manage the trade. Bad money management can cause you to lose on what could have been a winning trade and vice-versa, Good money management can help you get out of a bad trade or at least diminish the losses. And finally, how you manage position sizes and overall risk in your trading account is the final key to success.
To see our strategy for Account Management be sure to watch the Training Video – Trading Off Of Risk Capital In Your Account.