How Far is Too Far?

Brandon Wendell
Instructor, CMT

I wanted to continue with last week’s discussion on whether we should allow our trades to play out or exit them before the stop is triggered. I remember a discussion I had with Sam Seiden about price movement into supply and demand zones.

Sam and I were discussing trade entries and price movement into a supply or demand zone. For those of you who follow Sam regularly, you will know that he prefers “set it and forget it” type of entries to trades. This allows a trader to preset their orders, (entry, stop, and target), before the entry price has been met.  It also means that the entry will occur when price just reaches the proximal line of supply or demand.

Sam chooses strong supply and demand zones for entry based on the rules and core strategies taught in our courses at Online Trading Academy.  When the zones are that strong, price will not move into the zone deeply but will bounce just as it reaches it.

bwendell 20130702 - strong-bounce

I take many trades in that same manner.  But as an intraday trader, I have the ability to watch price action as it is happening.  I will usually wait until price enters into the supply or demand zones before entering manually into a trade.  This will let me enter at a better price that will do three things for me:

  1.  The profit will be larger as the entry is lower in demand or higher in supply
  2. The risk will be smaller as the entry is closer to the stop
  3. The trade has some confirmation due to visual confirmation of the trend change

#2 entry

One of the things that Sam mentioned is that if the level is strong, then price should not penetrate the supply or demand zones very deeply.  This is a factor for me when analyzing my trades or even deciding whether to enter a trade.  I like to enter trades inside the zone but want to see the price barely move into the zone before entry.  The deeper it moves into the zone, the less likely I will be to enter.

Unfortunately, there is not a set measurement as to how far is too far for price to move into the zone.  I generally do not want to see a penetration of more than 50% but that is a guideline and not a rule.  The best thing to do is to get to know your securities that you trade and see what price movement usually leads to a reversal or continuation.  Stocks will have certain “personalities.”  These are traits that occur on a regular basis and becoming familiar with them can lead to greater success in your trading.

Learn more about the core strategy at one of Online Trading Academy’s courses.  Visit your local center today and see how you can improve your trading success.

This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.