Lessons from the Pros


Base or Break

I recently received an email from a student that I would like to answer in this week’s article.


I recently completed the OTA online Basics Concept Course and enjoyed it very much. I am a day trader who only trades long because I have a cash account. I use the daily to determine trend, use the hourly to find supply and demand zones, and trade off the 5 and or 15 minute charts.  What has been occurring more frequently than not is that price never seems to retrace all the way from supply back to demand where I wish to purchase using one of the three entry strategies.  Half way down or so, price consolidates and remains in a basing pattern throughout the day.  Should one play the base strategy if it is wide enough, wait for a breakout from the base, or continue to wait for it to retrace to my pre-determined demand level. Since this is a day trade I close all my positions at the end of the day.  Should I continue to keep this potential trade on my watch list for the next day or longer, or discard it since it did not play out as a day trade?  Your professional help would be deeply appreciated. You might want to consider using this for a “Lessons from the Pros” future article as I am sure others have experienced my same dilemma. Thanks in advance for any advice you can render as how to approach this!

– Tony

There are several issues to address here.  The first is the use of timeframes.  I want to congratulate Tony for using the correct method to determine trend and also supply and demand for the curve on larger timeframes before trading on the smaller ones.  I recently recorded an Hour with the Pros lesson on Thursday September 27th on using multiple time frame analysis.  This recording is available to Online Trading Academy graduates in the archives.

Next, Tony was noticing that price does not always return to the origin of demand.  This is common in a strong uptrend.  Remember, an uptrend is a series of higher lows with higher highs.  If it is strong, then we should not return to the old lows.  Therefore we can look for other potential entries.  I will not go into detail here, but there are three such entries that we discuss in the Extended Learning Tracks that traders use to identify where to buy into a strong existing trend.

When prices base, they will either form a tight or wide base.  A tight or narrow base is one where we should sit back and wait for the breakout.  This tight base does not allow a trader the opportunity to make at least three times the risk that they would have to place in the trade.  If you see a wider base forming where the potential for profit to risk is equal or greater than three to one, then you can definitely take the trade.  Just remember, there will eventually be a breakout of the basing, most likely in the same direction as the larger trend.

Lastly, if a demand zone, (or supply for that matter), is not reached during the day, it is still valid for future trading sessions.  I will often day trade on demand or supply zones that were created several days ago.  As long as the zone is fresh, not previously tested, then it may be used for trading.  Obviously, more recent zones are likely to be stronger as they are fresher in traders’ memories.   Older zones can and do work too.  But I will always mind the trend of my trading time frame and the larger ones as well.

So keep those emails coming, I enjoy helping traders help themselves.  It makes me a better teacher and more importantly a better trader to recite the disciplines that created my trading success.

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