I know we do not worry about trying to figure the orderflow of TA traders, as it’s minimal and I have been able to change the way I look at the market. However I just have some queries regarding limits and stops.
Many believe limit orders build up either sides of s/r or swing hi lows. Say for example the market is trending up and this can be seen on a small 15 min chart. But it’s coming up to resistance. If we looked at a higher chart it may well be range bound or just a level that has acted as resistance in the past. Now, do you believe just before the stops on the other side of resistance there are also a thickening of limit orders just before or at resistance from participants who either enter short because they trade s/r or even others who use this level to take profits? ( as well as self fulfilling prophecy of s/r – which i know may be minimal) If so I know we do not blindly enter however if we determine sentiment etc to be neutral or bearish is it a valid strategy to enter just as resistance gets tested and use the limit orders to help push price lower.
If so, do you believe there are usually a thickening limit orders in a s/r area just before the stops, and if so could this be a better place for a entry for short trade or even move back into the range, or do you believe there is a better chance of stops being hit, which can be faded. This is all assuming we have a neutral/bearish bias (news/sentiment/macro etc).
I know stop hunts and ob are only small inefficiencies however, just curious if you also think limit orders just before s/r can be played and if so under what circumstances (instead of waiting for stops to be hit and fading). —— presuming sentiment is neutral or slightly bearish ——–
I am focusing more time on news/macro etc but just curious about your thoughts regarding the above.
This is a great question! I will give you my perspective.
I don’t know if there is a buildup of limit orders on the s/r or swing hi/lows. There may or may not be. I don’t think of that first.
First I ask, what is the battle of scenarios that is occurring. How strong is the news/sent/fund/macro situation. And all my other habits to determine whether a s/r will hold or whether it will be broken and the stops would be tripped, or whether I am uncertain.
For example there are various scenarios that I play out. So when I do my daily habits, in real time or at the end of day, the various scenarios that could happen are:
- I am uncertain as to whether there is a build up or limit orders on the s/r or swing hi /lows. So I just stay out and wait for more info and daily habits over the next hours and few days.
- I know with a good likelihood there is a build up of limit orders and they are stacking on a s/r and I want to place a trade because it is a good trade
- I know with a good likelihood there is a build up of limit orders and they are stacking on a s/r, but I DO NOT want to place the trade because the reward risk may be poor or perhaps the win rate is poor, or a combination of both. Just because I am know where a market is going to do, doesn’t mean I will place a trade. Sometimes I may have a reasonable idea what is going to happen, but either the reward risk, or win rate, or I may be scared of some other gap risk or scenario that could cause big losses.
- I know with a good likelihood that the stops are going to be tripped, and that I should wait for the stops to be tripped, and that I should FADE them to get in at a better price as I believe it will be a false breakout due to macro exhaustion and the news/sent/fund/macro bias being lower.
- I know that the stops are going to be tripped, but I still am uncertain and want to stay out as I may believe the reward risk, win rate is poor or other potential adverse scenarios risk I don’t want to be exposed to.
- Then there are other occasions where the market is approaching s/r, will trip the stop beyond the s/r, but that they should not be faded, you should actually go with the breakout and place a trade!
- Then the other scenario is where I expect the stops to be tripped, and that they should not be faded as the likelihood for sustained breakout is higher, but I still avoid it, due to potential reward risk ratio and win rate being poor or not wanting to be exposed to adverse scenario.
There are many traders that play the S/R game. It’s not just pure technical, chart pattern or price pattern traders that do it.
I remember Paul Tudor Jones said he does it. PTJ from Market Wizards said:
The market had been trading in a range between 82 and 86 cents, and I was buying it every time it came down to the low end of the range.
As you can see PTJ was playing the bounces off the 82 support level. So you can play that game if you want to.
What I do is interpret the information flow and scenarios using my macro model and macro exhaustion and news/sent/fund/macro philosophy.
As you said, in an uptrending market, there can be people who take profit or initial fresh short trades on a resistance point and do not necessarily wait for the topside stops be tripped. And sometimes this take profit interest or initiation of fresh shorts is very great and can cap the market and provide you a nice entry.
And YES, absolutely there are certain types of trades where say the market is in an uptrend, and you short it at a retest of the resistance, instead of waiting for a tripping of the topside stops, which may never come. The macro exhaustion point doesn’t have to occur after stops being tripped. The macro exhaustion point can easily occur when the market retests a s/r level as well. A volatility movement can begin and happen ANYTIME and ANYPLACE, depending on the battle of scenarios, information flow, situation and daily habits at that particular point in time.
For example, with the USD/JPY on April 11, 2013. If you waited for the 100.00 barriers to get broken, you missed out on the short entry. If you just shorted it at retest of the 99.90 resistance or so, then it worked out decently well.
Sometimes, if the trade is really good, say you are going to short at a resistance level and expect a MDMM or GM to the downside, which is a high reward risk ratio trade, then it pays to just short it at the resistance level instead of waiting for the stops to be tripped, which may never come, if you truly expect the trade to be MDMM and GM movement. If the reward to risk is so high, then you don’t want to be a “dick for a tick” as some people say it. For example if you expect a 600 pip move to occur, who cares if you short at a resistance or whether you get in 20 pips higher after the stops get triggered? If the trade is that good and reward risk so high and potential win rate so high, you just get in! Who cares about 5 or 10 or 20 pips in that situation.
On the other hand, if you only expect an intraday movement, then the tripping of the stops can make or break the trade from the standpoint of providing you a better reward risk ratio trade. If you only expect a 50 pip intraday movement to occur, then whether the market trips the stops for 5-20 pips is very important as that represents a large portion of the intraday movement.
I hope I answered your question and gave you a powerful philosophy and principles and mindset to work with.