How to Re-enter After a Winning Trade

10/11/2012 6:00 am EST


Michael Bellafiore

Author, One Good Trade: Inside the Highly Competitive World of Proprietary Trading

Veteran trader Mike Bellafiore shares a question-and-answer between him and a newbie trader, which other newbies could find helpful.

“Mike, I am currently ‘live’ for about a month now, and my results are inconsistent thus far. I have some questions for you. I realized I have a problem when doing a trend play, and I managed to grab about 6-8 ticks profits, but the problem is once I am out of the trade, I am mentally not prepared to go in again because 1) I am not sure if a reversal is coming, 2) Afraid to put on yet another trend trade since I already made money from the initial trend earlier. My mind gets mentally challenged to go back into the trend for fear of a reversal.”

“How do you get rid of such a fear of losing money on a trade which you had made money earlier? Also, do you try to trade its consolidation period/retracements? Since price tend to trade a lot more quieter after a trend, I get very hesitant to put on anymore trades.”

Give me a set up when you would get in after getting out.  What would that look like for you?

“Here’s the setup. Allow me to explain the rationale for the trade.”

Intraday Fundamentals - Theme of the week was on Spain potentially asking for a bailout, and I had suspected that there would be a lot of fear/anxiety in the market, which would give little reasons for people to bid up the price in anticipation of such an pivotal moment in the European story. There would be scared money going out and little hot money coming in to continue that trend. Eurostoxx had been trending up for the last week and I felt that market will not buy up the market with so much uncertainties in the market.

Technical Analysis - 2525 was a big level for Eurostoxx last week, as that was a level that it had not breached and held for the past 2 weeks. On Friday, after Non-Farms Payroll, it broke that level but it took only less than 1.5 hours for it get smacked back down and that level stayed offer for the remaining of the session. To me, that meant weakness, if market is not going to hold the bid after it managed to break a price that has not been breached for the last two weeks, sellers will see that and will look to sell that price. My bias for a short play for the upcoming week was formed. On the next day, Eurostoxx opened lower than the close of Monday, and it managed to trade up to 2512 once the pre-market market opened, however, it had some trouble breaking past the closing price on Monday. Once the cash market opened, sellers appeared and sold off the market at the 2507 mark. Sellers cleared 5 ticks in 5 minutes after buyers tried to buy up that price during pre-market, these are strong selling indications! At this time, I was going in with a short play at 2503 level with my price target set at 2492, which on previous sessions found some resistance.

Reading the tape - After the initial sell off, I waited for a consolidation to get in. At 2503, it was apparent that some form of consolidation was taking place, after a sell-off like this so early in the session, I was sure market will not reverse so early in and the downtrend would continue. 2503 held the offer after buyers repeatedly tried to clear it, they failed, and I got in. However, I did not stick to my game plan and cash out at 2492 as I saw some profit taking and I was afraid market might reverse and I would end up with little profit or breakeven price. I ended up covering all positions at 2498.

After I had gotten out, I had wanted to go back in again because it seemed that the market was still itching for a sell-off. However, I was afraid to get back in because I was afraid of a reversal. The market managed to trade down to 2490 and bottomed out, but regardless, I find it hard to get back into a trade after I made some money on it. Is that something that you have problems too with Mike?

Figure 1
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I like the set up and first trade. Well thought out. Good use of technicals, the tape, and intraday fundamentals. The question is after you ditch on your first trade should you get back in?

Just like you have formulated a set-up to enter after a technical level fails such as 2525, you should develop set-ups that are worth getting back into for you after you close a profit.

An example would be the buyers, which caused you to cover are clearly not there anymore on the tape. What would that look like for you? If you see that develop a set-up that makes sense to you and reenter. Play for the move to the 2494 technical level.

Another example would be clear intraday resistance on the tape that is stronger that that buying you saw. If I saw that I would reenter my short, set my stop above the resistance, and hold for the move to 2492. But you must be comfortable with that trade before you make it.

Develop a list of sub-setups where you would reenter. Be sure not to overtrade. Start with your best sub-setups and grow your playbook from your winning set ups of reentry.

Do not be afraid to get back in. Your job is to do the right thing as a trader. Not to be overly careful to lose some profits from your first trade. If reentry is the right trade then you MUST reenter no matter that you made a nice profit on the first trade. Trading is a game of math. No matter if you are wrong. It is only if your set up gave you an edge. If so, then pull the trigger and let the market determine the results. I hope that helps.

By Mike Bellafiore of SMB Capital.

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