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You make your trading choice and live by the saying "whatever will be, will be". Easier said than done of course but an extremely important part of finding any success in this business.
Assuming you know what a pennant is, let's say that after scanning a few
charts, you see the pattern emerging and after reviewing context, decide that this is a trade you want to take.
There are a few questions to answer including: Where to enter Where to stop out When to take profits
These three questions must be answered before entering the trade
and without knowing them, you should assume you don't have a
possible trade.
Where to enter: While there are many methods for "pinpointing" entries, it
does not have to be complicated. Some will play the breakout,
rejections, or a new bar high while others just get the trade on.
Where to stop out: If you don't know where to exit if the trade is a failure,
how will you ever consistently manage risk? You often hear to place your stop where you'd be proven wrong but that area can often be played by the bigger money (more on that in a later post).
When to take profits: Lots of options here include one times the risk then
trail, chart patterns, structure...
On this chart, you come across the following pattern. Whether or not it
fits the exact definition of a pennant is meaningless. What matters is if it
exhibits much the same "action" as the text book definition.
A. Solid strength in the run up to the pause in price. Is that important? While not a 100% guarantee of a
continuation in the up move, the odds favor a continuation once the pattern
resolution occurs.
Some traders simply buy into the pattern when it starts the tighter
consolidation as shown with label #1.
the break of the open of a candle at #3 or, not shown, a failure test of the base
of the pattern or a break of a consolidation on a lower time frame.
Stops can be a little tricky as you want to ensure a decent position size while
ensuring you are out when the trade is no longer valid. Many traders will place it just under the low of the pattern as shown by the red line.
The problem is...many traders would place their stop there (easy running)
plus a price poke below does not invalidate this setup.
My choice is the blue line which keeps it out of the noise of the market
although neither of these stops were challenged in this setup.
Profit taking has many options such as scaling out equal to risk and leave a
runner. What matters is the consistency of what you do.
Once you have your entry criteria, your escape if the trade goes against you, and how you will take profit.the
next step is the hardest:
Here is an example.
After a sloppy run up in the EURUSD, I sell stopped and was triggered into the short. I had a scale out target equal to risk that left no risk on the table of the
trade.
Price missed the scale out by approx 50 pips and started a move back up to an area that was showing resistance
and started to challenge my stop. The green candles were certainly larger
than the previous red and I honestly had to fight the urge to save a few pips
and market out of the trade.
I had to resort to "whatever will be, will be" and since I already accounted for the risk on the trade, it would have been a loss amount that fit my overall
plan.
That said, while the reversal type candles didn't justify an exit, the first green candle did as it appears to be
momentum against my position.
If I was actively managing the trade, that would have been an exit to be
comfortable with because the point of a swing trade is to take one clean
swing in the market. The green candle ruins the clean swing aspect.
The trade has since recovered and I had to add the scale out back in as the
order had expired. The question is what happens if the move fails again?
While "whatever will be, will be" is a great mantra, it's hard to ignore an
obvious change of state of the market.
Trying to be consistent is job #1 however blindly following a rule when
all objective signs point to exit can erode much sought after profits that
often times are hard to come by.