How to avoid being stopped out?

BobS

I really like the strategy of waiting until you have a divergence in an Oversold Cci and placing a buy stop above of today's high, and then when that it hit to place a stop below the swing low. However, if you look at the attached chart you will see that doing that following the candle on Oct. 13 you would have gotten in on Oct. 14. Then On Oct. 15 you would have been stopped out (as it went even lower on Oct. 15 than on Oct. 13), before it made such a nice gain (on very high volume).

I think I am missing something. Can someone tell me an indicator or overlay or insight about the price and/or volume bars which should have led me to avoid buying on Oct. 14 and then led me rather to buy on Oct. 15?

http://stockcharts.com/h-sc/ui?s=IWM&p=D&yr=0&mn=7&dy=0&id=p31401003019&a=372689951

BobS

By the way, I do observe the weekly chart and the hourly chart of equities/ETFs I am considering buying. So, any insights from either of those charts are also welcome. Thanks in advance.

markd

Bullish signals probably work a little differently in bearish markets. IWM had begun a bearish phase - this divergence was preceded by a double top, a lower high and price below a falling 50MA. These factors say sellers are strong, so buyers are going to face headwinds trying to move the price up. Just as in a bullish market price doesn't turn down until it has failed several times to continue up, in a bearish market sellers are going to try to keep pushing the market down. I think that accounts for the test that caught your stop. (Notice this was actually the SECOND cci divergence in this move - the first was totally overwhelmed). So if you want to trade bullish signals in a down market, either widen your stop to account for seller strength, or switch your entry to the test area (assume there is going to be a test, in other words) - wait for the low to be broken, then buy after a close (maybe hourly?) above it.

On the hourly chart, a hint that the trend was about to change was the first bar on the 15th. After a deep dip it closed at the top. NOT a bearish move. Most of the rest of the day tried to get back below that bar (in a bear market, sellers want to sell!), then when it couldn't, it finally rallied.

So you might think of it this way: in a bull market, a sign of strength will scare away the bears - that's why buying above the high works in a bull market - the bears have given up. But in a bear market, sellers are not afraid - they will attack a sign of strength, just as bulls will attack a sign of weakness in a bull market.

BobS

MarkD, that was exactly what I was looking for on many counts. I had seen the signs of a bearish trend which I plan to use. But I appreciated how concisely you delineated that bear trend. More importantly for me, you showed me how to use that insight, namely in expecting bears to be much more confident and aggressive, just like bulls are in a bullish trend. Very helpful.

Thanks also for the particular insights into the bars on the hourly chart on Oct. 15. Those insights (especially in the context of "bears really want to sell in a bearish period") were most helpful. Thanks so much.

Logistically, I realized after posting that there is a much easier way to post a chart, using the "attach a file" button. I will use that next time.

However, I have not seen how to edit my post after making it. So, I just added another comment. I noticed that you had edited your comment at 6:02 this morning. Is that a privilege you have because you have answered so many questions, or is that available to others as well? If so, how does one do that?

gord

Bob, I've added the chart to your original post above.

WRT editing, the author of a post has the option to edit it for 1 hour only.

BobS

Thank you Gord for adding the chart to my original post. Immediately after posting my comment I noticed an icon that looks like a wheel (or settings button) to the right of my post. When I clicked it, I was able to add three more sentences to my comment. Thanks for that tip.

ekwong

How to Avoid Entering Too Early When Trading Divergences

BobS

Thanks ekwong. The article at babypips was interesting. I particularly liked the idea of drawing trendlines within the indicators.

BobS

MarkD: I have another question about this same trade. I think I can see now some more reasons for waiting until the retest on Oct. 15. On Oct. 15, several indicators (Cci, K7 and k14) cross above OS on the daily chart. In light of this and the 2 weeks worth of divergence on daily Cci, an entry during the day on Oct. 15 seems very reasonable. I was wondering if it would be reasonable to make a tighter trade (smaller stop) on the hourly chart. Specifically, the first bar of Oct. 15 tells me that I need to place the stop below 53.50. But I was wondering whether it would have been reasonable to placed a buy 5th or 6th hour between $54-55. Would the divergence and the crossing above OS not only of Rsi (on Oct. 14) but also of Cci, K7, and K14 on Oct 15 have been sufficient evidence to make such a trade with confidence. What do you think?

BTW I think I have now also attached an hourly chart of IWM including Oct. 15.

markd

I don't use those indicators (except K with different parameters), so I don't know how they behave in a bearish context. But with any indicator I would have less confidence in a bullish signal in a bearish context. Not that they can't work out, but I think the odds are lower, so it would probably be best if you have a strong urge to take the trade to take a (much) smaller position.

I think the reason to take the trade in hour 6 is it's the third or fourth time price has been unable to break 104/105 on high (or higher) volume. The high volume bars in a bearish context should be "well formed" (open at/near the high, close at/near the low, on at least average range) and make down side progress. The opening bar on 10/15 is clearly "poorly formed" for a bearish move, and the fifth and sixth hours are also high(er) volume and poorly formed (hour 5 is a doji - indecision on high volume). So the bulls made a statement in bar 1, the bears attempted to counter it in bars 5 and 6 and clearly failed. So if the bulls are still out there, now would be the time to expect them to come back in strength. They don't have to, of course, but it's a pretty good bet. Still, I'd keep it small until the trend is confirmed in a higher time frame.

BobS

Thank you. That was exceptionally helpful. In order to enter later when the trend is confirmed in a higher time frame, what would you think of a larger entry on Oct. 20th? I am particularly impressed with the doji in the final hour of Oct. 17, which puts in a low that is higher than the tail of the previous bar and does so on higher volume. Based upon this action on Oct. 17, I am thinking of a buy the next morning of trade, assuming that price has risen above the wick of the doji. Specifically, I am thinking of a buy at 108, with a stop just below 107. What do you think of that? Would you say that the short-term trend is evident on the daily time-frame since it is above (and on Oct. 20 resting upon) the 10 dma?

The reason I seem irrationally bent upon finding a way to make money on a short-term rally against the medium term trend is that I would like to find a way to make money with an ETF and then with its inverse. Thanks again.

markd

I think an entry on the 20th after the open would be OK because on 10/16 price closed above the high of the first rally attempt 10/14, and on 10/17 failed to close below that 10/14 high, so the breakout on a daily time frame has been tested and held.

In general, a close above or below an MA or EMA is not really meaningful (to me) except coincidentally if it occurs together with a close above resistance or below support (usually a high or low, but sometimes an open or close). MAs and EMAs are calculated points, not actual prices that occurred as a result of supply overcoming demand or vice versa, so they do not represent "real" support or resistance. The market is "episodic" - it is very busy and excited (where the volume is), then quiet, then busy again. The busy times make the support and resistance prices. But MAs weight all price equally, regardless of volume - they smooth out the busy and quiet times, so they don't really represent where the true market decision points are. They are helpful shorthand for quickly evaluating a chart (where are we - ok the 10 is below the rising 50, which is above the rising 200, so it's a dip in a strong market), but price vs. MA or EMA doesn't really tell you about where supply and demand are or might be.

BobS

Very helpful indeed. Just when I think I am reading the bars (candles and volume in conjunction) well, I learn so much more from you. Thanks.

Looking back, that 107 top was hit on Oct. 10, 14, and 15. And when it was met on the 15th and broken on the 16th were high volume days. And when it was tested on Oct. 17 and the morning of the 20th were lower volume days.

Thanks for explaining the superiority of supt and resistance over MAs (and the reasons for it). I am starting to see why price sometimes breaks those MAs and then keeps going up. Thanks again.

Two more short questions in light of this:
1. Since this appears to be such a successful test of clear support, would a stop just under 107 seem to be a safe stop?
2. If you got in early on the morning of Oct. 20th, what would be the lowest you would feel free to place your buy?

markd

I think your idea of getting in above the high of the last hour of the previous day is sound, and a stop under 107 with that entry is pretty reasonable, too.

BobS

Thank you so much, Markd.