Location, Location, Location

06/11/2014 6:00 am EST


In trading, just like real estate, it’s all about location, and John Hoagland of TopStepTrader.com offers tips to avoid getting stopped out of a position, even when you’re correct in predicting the market’s next move.

As the director of trader development and as a trader for many years, I have known and spoken to hundreds, if not thousands, of traders about their craft. One of the most common things I hear is, "I was right and got stopped out just before the market followed through with what I expected!" Sound familiar? If you’ve been trading for a while, you’ve probably uttered those words more than a few times. I know I have. I usually respond to that statement with a question: "How did you arrive at that location for the trade?" Most of the time I get an answer like, "Moving averages and Fibs” and the occasional "I don't know."

It is up to you how you want to look at the market and what tools you want to use. I believe the missing part of the equation does not have to do with the tools or studies being used. How we act is in direct relation to our belief system and is unique to each of us. This short list of suggestions contains some of the first things that need to be considered when facing the trade location issue.

With all the screen time, learning, and journaling we should be doing as traders, I hope you are gaining an intuition about certain features of the market. I hope you are starting to recognize the difference between the impulse (emotional) trading and real intuition. Writing and reviewing your stream of consciousness while trading can help you recognize your mental and physical patterns and how you relate to and react to different situations in trading. This is time consuming and takes a lot of effort, but the rewards are worth it!

The most commonly used tools have a downside—a large number of traders over many time frames use them. For example, moving averages are among the most popular tools. Simple or exponential, other traders are viewing them. Other traders are making trading decisions based on their positions and crossovers everyday. Moving averages can be very effective when used as part of a greater consideration of overall trade location. Always take into consideration whether the short time frame traders you are competing against are getting in with you. If you gain that sense, you stand a great chance of getting better trade location. You want in when the last of the herd is getting out. Remember, Jim Dalton says it best: "Most of the people you are competing against are almost always wrong."

For me, one of the best tools for finding better trade locations has always been the Market Profile. Being able to recognize where the market is finding acceptance and rejection has kept me out of more bad trades than all other tools combined. Acceptance is where the herd trades. Areas of rejection are where the professional traders trade. Initiating trades in areas of rejection can give you an advantage in many ways. You never have to pay a lot when you are wrong. Trading close to areas of failure gives you cheap trades and great information. When you are right you will usually see price action in your direction quickly. You won't need to hang around in a trade that is going nowhere, taking time and perhaps costing opportunity.

Fear of missing out is probably the biggest reason for compromised trade location. One possibly fatal mistake is the inability to wait for the market to come to you: the need to get in early in case the market doesn't get to your entry. It only serves to increase your risk (your stops need to be further away) and decrease your profit (target is now closer to your entry). Remember, as traders our job is to limit risk, not just take trades. So if you miss a couple of trades, that's good information. Perhaps you need to refine your market state identification.

As much as I don't like this excuse, the fact remains that there are predatory traders and programs that sense order flow and recognize very short time frame imbalances in the market. They will squeeze traders out of good positions in this way, so be aware of them. Recognizing their activity is not easy, but just remember: they are going after the herd!

Take a good look at these concepts and find something you can use. Do you recognize yourself in any of these ideas? I know I do. I think most traders would have a much greater chance at success if they would just give their plan a chance and trade the plan.

By John Hoagland of TopStepTrader.com

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