I am having a tough time in coming up with how to use the stop loss and OPTION BARRIER info and come up with a trading strategy built on it. I have been thru the entire mastery course material. Its very vast and indepth but sadly it lacks any clear cut strategies that I could employ straight away. Like entry, stops and targets. Could you just suggest one or two strategies that I could use with Stops and OBs?
I think it would be best if I start with a small and quick overview of my journey and the stop/barrier mindset evolution.
When I went from chart/price patterns to order flow, I started with pure stop losses and option barrier strategies. In order to help me develop a beginner stop hunting / option barrier strategy, I went on a chart, and started to market off the stops and option barriers that were triggered in the past. I got rid of of everything – all the tech indicators, moving averages, and just had a plain price chart. Instead of looking for chart and price patterns, I looked for pure stop losses and option barriers.
This is what most beginning traders have on their charts:
So I went from that to something like this:
When I first started, I tried to fade every single stop loss level. That only works decently in choppy markets. When the market breaks out, then you get caught on the other side of the breakout and suffer too many losses.
Eventually I noticed a few things such as: sometimes when the market trips stops, it falls right back. Other times, it price cascades very quickly. Other times, there is a gradual breakout.
Which is why I created the different types of stops being tripped lessons, to encompass all the different scenarios you can experience.
Which is why I had to change my philosophy to:
– Sometimes I fade the breakout (fade the move)
– Sometimes I go with the breakout (go with the move)
– Sometimes I do nothing (you can’t be certain every second of every day)
In order to complete this shift, I realized that something was missing from order flow. I was trying to trade stops and barriers in a vacuum, with nothing else to go on. Something big, very big was missing. Everyone calls this thing something different. Some people may call this element “sentiment.” Other people call it “underlying conditions” or “general conditions.” Other people call it “global macro.” Other people call it “variant perception.”
My name for this element is the news/sent/fund/macro players. The principles and concepts such as expectation shifts, global macro battle of scenarios, macro model, market sensitivity research, news impact research, ODVE, MDMM and GM movements.
It was only once I understood those principles that I was able to elevate my stop hunting and option barrier game to a higher level, where I could judge with better accuracy when to fade the move, go with the move, or do nothing.
Just pure stops and option barriers is decent. It helped me out immensely making the transition from chart/price patterns to more order flow trading. But in order to complete and cement the transformation, at least for me, it required that I learn about the principles and strategies that I have taught in the Mastery Course.
Entry, Stops, Target
With regards to specific entry, stop losses and profit targets, I don’t want to be intentionally vague because I know you are looking for some concrete numbers. But the entry, stop, profit targets chance according to my interpretation of the order flow, macro model and battle of scenarios, volatility in the market, how big of a move I am expecting, etc. It really depends on that moment in time. The market is dynamic. It has no defined ending point.
As Livermore said:
Well, it would depend upon conditions. You can’t give any closer answer than that.
I will attempt to give you a closer answer than that. For example, if I am going to place a trade fading the stop losses, I am first going to ask myself, why is it a good trade, and if the market is going to go breakout instead of retracing the tripping of stops. I would look at my interpretation of information flow, my macro model and battle of scenarios to see which side may win at that moment in time.
Once I determine I want to place the trade, I need to choose some sort of stop loss. Various options include:
1. A physical stop loss
2. A mental stop loss
3. A mental stop loss range where I would consider getting out of the trade. (ex – if the market move between 75 – 110 pips against me, I will re evaluate the situation and see if I should get out)
I don’t always use physical stop losses. Sometimes I just a mental stop, so when the market trips that point, there will be a high chance I will just get out. Other times I only have on a really small position, so even if the market moves 1-2 days against me, it won’t hurt me much, so I can get a feel for how the market moves.
I tend to follow the principle that Michael Marcus said in Market Wizards:
When a trade met all my criteria, I would enter five to six times the position size I was doing on the other trades… The other trades broke even and kept me amused.
My goal on the other trades was just to break even. I knew that the big money was going to be made on the trades that met my criteria. There will always be trades that meet those requirements, but there may be fewer of them, so you have to be much more patient.
I try to keep my position sizes small, sometimes fading stops or going with them, even if they only partially meet my criteria. Then when I find something that can cause immediate volatility, and I believe I have timed it right, then I increase my position size.
I will also ask myself, what type of trade am I expecting this to be? If I am trading the USD/JPY fading the stop losses, then am I playing for a small intraday movement of 30-50 pips? Am I expecting a ODVE to occur of 100-200 pips? Am I expecting this trade to be the beginning of a MDMM movement of 200-600 pips?
How big of a move I expect, influences how big my stop loss is. If I only expect a 30 pip move, then I won’t use a stop bigger than 30 pips. If I only expect a 100 pip move, then I won’t use a stop loss bigger than 100 pips. Now obviously, you don’t only want a trade with a 1:1 reward risk ratio. You want a bigger reward to risk ratio trades. winners that can be 3x risk, 5x risk, etc.
So that is why there are sometimes when I can make the determination that I can get in with a small stop, say 50 pips, and expect the market to go for a ODVE for 200 pips. Other times I may have a stop loss of 30 pips and only expect the market to move 60 pips.
If I expect it to be a big move, then I may use a bigger stop to try to stay in the move. If I expect a 500 pip move to come, I may try to time it with a small stop of 50 pips. Other times, I may try to just throw on a smaller position, using a larger 100 pip stop.
Now, just because I try to get the expected move correct, doesn’t mean that my interpretation will always be correct. Sometimes I fade the stops and I get caught on the wrong side of the market and I should have just stayed out of the trade because it was a bad trade. For example if there are stops above the market and I fade them expecting a ODVE to the downside, but the market roars higher for a MDMM move higher, then it wasn’t just that my entry and stop was wrong, it was that my interpretation of the situation was likely wrong.
So when you take a loss, it can be because of two general reasons:
1. Either you were right on the direction of the market, but you just timed it wrong, and got in too early or too late, or used too tight a stop and got stopped out.
2. You were just wrong on the direction on the news/sent/fund/macro players in the market.
With regards to profit targets. Similar rules apply to all trades, whether they are stop loss/barrier related or not:
If I am fading stops and going for an intraday move of 30-60 pips, then once it reaches that range I start looking for an exit.
Sometimes I feel the snapback from the stops is exhausted, so I just market order get out.
Other times I can try to use a 1-2 bar trailing stop on the intraday charts of 15 min – 1 hour, and see when that volatility in my favor subsides to get out. Sometimes I target another stop loss cluster so if the market triggers it, I get out.
Other times if I am expecting a ODVE, then I hold it for a few hours to see what happens and take profit near the end of day.
If, at any moment I have the trade on, whether it is showing a profit or loss, if I interpret the situation and scenario has changed based on my interpretation of the information flow, news, etc, I will just market order get out of the trade, and consider reversing, if appropriate.
Depends on Volatility
A lot of beginning order flow traders automatically throw around the 30 pip stop / 30-50 pip target, etc. It is fine in some cases. But the market is dynamic. Entries, Stops, and profit targets change depending on the financial instrument, and with my interpretation of the information flow and volatility in the market. If the volatility in EUR/USD increases to an average of 300 pips per day, then using 30 pip stops is just begging to get stopped out. If the average volatility of the EUR/USD is around 100-150 pips, then 30 pip stops can work. If the average volatility drops to 70 pips per day, then using 30 pip stops might be too big.
With regards to strategies, a lot of it depends on my daily habits and interpretation of the information flow and macro model. Without knowledge of the news/sent/fund/macro players and the scenarios that can cause the market to move, then stops and option barriers can lose a lot of their potency. With that knowledge, then their accuracy and helpfulness increases tremendously.
So sometimes I use stops to get in quick intraday scalp trades of picking off 20 pips here, 30 pips here, 50 there, etc. Or to just feel the market while interpreting more information to try to find a bigger ODVE or MDMM move.
Other times I use stops to try to get better entries into the ODVE and MDMM movements, while using larger stops.
Other times I use them as profit targets where I believe the macro will push the market into the stops and barrier, and I can liquidate at a bigger than expected profit.
There are some times when I have a bias on a market, but I will only enter when it trips stops to give me a more favorable entry point and thus perceived reward risk ratio.
Other times, I don’t care about the stops or barriers. If I interpret the information flow and believe a big scenario and move is coming, and I look at the current market price, and I like the trade, I just place it market order right there and then.
For example with USD/JPY, the proper macro model, according to my read of the scenarios is to NOT SHORT THE LOWS. Thus, you can try to fade the downside stops.
An example from the Nasdaq futures:
Other times, you shouldn’t try to fade the stops, and should instead “Go With The Move”:
Now, you may ask me, well how do you know which layer of stops will be tripped and how far it will run, and whether you should fade or go with the move. Well, as I have been saying, it just depends on the situation and information flow and scenarios, and news/sent/fund/macro players at that specific moment in time. I can’t really give you any closer answer than that.
I can’t know exactly what will happen at every stop loss location or barrier location all the time. Sometimes, even with all my habits, I am legitimately uncertain, so I stay out and gather more information from the next day, etc.
I can teach you how to think about the market, view the market, the right principles and strategies. But If you are asking me whether you should fade the stops or go with the move for EUR/USD, on some date in the future, and with what entry, and exact stop loss size and profit target, then I can’t give you such an answer, because it’s impossible to know. No one knows what will happen on a specific day in the future with a specific financial instrument, when it trips certain stops or barriers. I don’t know and neither does anyone else.
I would have to analyze the situation at that moment in time. Some analysis stays fairly consistent with regards to the macro model, if a market is going to be trending for a long time. Other times, the situation and volatility can change at a moments notice, even every day or a few times a day.