Improving FX Scalp Trade Entry and Stop Loss position

[JJP]

Hi, 

Thank you for taking the time to read my post. I have been trading for a while, but I still consider myself as a beginner. I have built up a small number of scalping strategies largely based on momentum movements out of identified ranges and macro economic news releases. I am trying to improve my entry technique and reduce my exposure through assertive stop loss positioning... without over smothering the trade. I am very interested to understand the views of other traders, and welcome your comments.

In the chart below we see a typical quiet day on EURUSD, i.e. no major news releases. It is taken from Tuesday 2 June 2020, just last week. A double bottom, at least it appears this way to me,  forms at the bottom of the Asian session range, and then a break occurs above the range. Despite a bearish outlook by analysts, we are about to enter a bullish trend for the rest of the week. Forgetting, for now, about the red resistance line I have drawn above the range (which might make us hesitate from this trade) the trade plan is to go long, catching the break and scalp the market to the blue line, Target 1 (T 1), take half the position as profit and move Stop Loss to Break-even  and then on to Target 2 (T 2) where the position will close entirely.

My first question: What is your advise on trade entry and stop loss position. Is it best to enter on the break candle by setting a buy order above the range (Entry a), and if so, how many pips above the range should the order be placed. Or, is it better to wait for the break candle to close, seeing if it closes above the range, and then enter the market at a break above this candle at Entry b. If Entry b, how many pips above the break candle should the position be taken?

My second question: In either entry scenario, where should the stop loss go. At the bottom of the break candle (SL a) and if so, how many pips below? Or at the bottom of the range (SL b) and if so, how many pips below? Or perhaps somewhere else?

On the second question, my back testing shows that when a strong break occurs, the bottom of the break candle is rarely tested. However, on a weaker break, the bottom of the break candle can be taken out. In this instance, the market will sometimes bounce back at the bottom of the range and take the trade into profit. Of course, it can also continue its down movement and reverse the direction for the entire day. 

In short, I don't want to take a loss of the entire range box, but I can be frustrated when the break candle is breached against the trade, taking SL a out, and then rebounding only to take the trade into a profitable position and leaving me with a stop out loss.

 

 

[phillo]

perhaps it might be a good idea not to look at the 5 min chart in isolation , but in higher timeframe charts as well

[JJP]

5 hours ago, elle said:

perhaps it might be a good idea not to look at the 5 min chart in isolation , but in higher timeframe charts as well

Yes, I use the higher time frames to understand the trend and to identify areas of support and resistance and areas of potential supply and demand. I take these into consideration while planning a shorter time frame trade. That done, then would you place a SL above or below the break out candle from a consolidation area, or above or below the consolidation area itself? Given, of course, that there is sufficient room for the trade to run in order to meet a reasonable expectation of an acceptable risk : reward. 

[Caseynotes]

19 hours ago, JJP said:

 

a closer look at the candles tells a story, the breakout green is large and saying many traders bought the breakout, the next candle is even larger saying many traders bought on the close of the breakout candle.

Entries on unconfirmed breakouts are relatively risky so the only way to make them pay over many trades is to have a relatively tight stop (lower win rate but higher risk reward ratio), buyers won't want to see price re-entering the range box. So the likelihood is that the new longs will have a stop just below the top of the range, 

If the buyers are wrong they are going to be trapped buying the high and will get out quick, selling their buy contracts if price re-enters the range will likely cause price to fall right to the bottom of the range.

A lot of technical books say the stop for a buy breakout should go below the bottom of the range but having been trapped buying the high you then face the prospect of selling the possible low around support. To avoid that you would need a even larger stop but on a risky unconfirmed breakout trade doesn't make for a very good RR and so as a strategy is less likely to be profitable over many trades.

[JJP]

1 hour ago, Caseynotes said:

a closer look at the candles tells a story, the breakout green is large and saying many traders bought the breakout, the next candle is even larger saying many traders bought on the close of the breakout candle.

Entries on unconfirmed breakouts are relatively risky so the only way to make them pay over many trades is to have a relatively tight stop (lower win rate but higher risk reward ratio), buyers won't want to see price re-entering the range box. So the likelihood is that the new longs will have a stop just below the top of the range, 

If the buyers are wrong they are going to be trapped buying the high and will get out quick, selling their buy contracts if price re-enters the range will likely cause price to fall right to the bottom of the range.

A lot of technical books say the stop for a buy breakout should go below the bottom of the range but having been trapped buying the high you then face the prospect of selling the possible low around support. To avoid that you would need a even larger stop but on a risky unconfirmed breakout trade doesn't make for a very good RR and so as a strategy is less likely to be profitable over many trades.

Thank you Caseynotes, for this valuable, and much appreciated feedback. Entering on the close of a strong break out candle is not something I had considered. However, I will now give it thought and run it through back testing versus waiting for the break out candle to be broken. If it has at least the same win ratio, it does make for a cheaper entry, which, of course, is desirable in a scalping trade.

Yes, it is a low win, high reward strategy, which, as you have clearly addressed, is why a low risk position is sought. Placing a SL below the range is just too expensive. However, ignoring the bottom of the break out candle and placing a SL just back inside the range, as you have highlighted, seems like a good way to avoid larger than necessary losses. I will also run this through back testing and hope to see a cheap system with sufficient rewards over time to merit trading it seriously.  

Thanks again, I think this allows me to move forward.

[dmedin]

21 hours ago, JJP said:

A double bottom, at least it appears this way to me

Can you tell me why, in that case, you didn't enter your trade after the second bottom put in its appearance and let your profits run?  Scalping seems to me to be a stupid way of doing things.

[Caseynotes]

10 minutes ago, dmedin said:

Can you tell me why, in that case, you didn't enter your trade after the second bottom put in its appearance and let your profits run?  Scalping seems to me to be a stupid way of doing things.

why would anyone buy at the second bottom? a double bottom isn't confirmed until the valley has been breached.

[JJP]

3 minutes ago, dmedin said:

Can you tell me why, in that case, you didn't enter your trade after the second bottom put in its appearance and let your profits run?  Scalping seems to me to be a stupid way of doing things.

The neck line of the double bottom coincides with the break out of the range. Perhaps conventional, but I always thought double bottom, or top, should be traded on the break of the neck line. I am very open to learning otherwise. I scalp because I just don't have the psychology to trade longer term positions. I've tried trading on the day chart and even down to the H1, and through multiple wave cycles. I just hurt too much when a trade is in the red and so I want it to be over quickly. I like a quick decision. I want a quick, small and relatively painless loss, or a big win. Because of the way I manage the trade when it is live, more than 70% of my trades close in profit. A very small number of these in significant profit. I want to continue like that but with an even cheaper risk position so I can make better trades and maximize overall profitability.

[dmedin]

4 minutes ago, JJP said:

Perhaps conventional, but I always thought double bottom, or top, should be traded on the break of the neck line. I am very open to learning otherwise

I thought that many traders, who think they have spotted a double bottom (or head and shoulders or whatever) will enter their trades early to get a headstart.  Like those who go short as soon as they think a right shoulder has been formed, with a stop just above it.

[Caseynotes]

3 minutes ago, dmedin said:

I thought that many traders, who think they have spotted a double bottom (or head and shoulders or whatever) will enter their trades early to get a headstart.  Like those who go short as soon as they think a right shoulder has been formed, with a stop just above it.

some countertrend traders may try that but once again it's a high risk strategy and therefore has a low win rate. The better probability is to wait for the neckline drawn through the tip of the V to be broken with a target equal distance away. Resistance or support can hold out for many attempts to break it before giving in.

[JJP]

I've completed some back testing on what I call the European and UK Open. It assumes a range is formed between the Asia session close and the European early trading. That is between 06:00 and 06:59 UK time. It then assumes that this range will be broken in the UK Open (07:00 to 09:00).

Rules:

• No trading this strategy on days when a major UK news event is scheduled. Trade the news instead.
• Ignore trend and trade the break out candle. Entry 3 pips above or below break out candle. Stop 3 pips beyond the other side of the break out candle
• Break out candle must not be a counter break doji, hammer for break down or hanging man for break up and must close outside the range.
• Trade order is cancelled if opposite side of break candle is breached before trade is triggered.
• Move the trade to break even just as soon as the minimum stop distance will allow.
• Trail the stop towards the trade in increments of 1 deviation.

Test Range:

• GBP/USD 10 June 2019 to 30 September 2019
• Trade dates for one quarter,  selected at random.

Results:

• 81 Trading days
• 11 News days
• 70 Trading opportunities
• 15 Not triggered
• 13 Losses
• 20 Break Even
• 22 Wins
• Average R:R on wins 3.04
• Average R:R on wins after 1 very large win removed 2.41
• Candle Loss, but Range win 3
• Candle Break Even, Range win 7
• Candle Break Even, Range Loss 12

So this gives us a 24% loss rate on trades taken. It shows that when the break out candle is broken to the opposite side of the trade, it is more likely that the range will also be broken, and so we can cheapen the trade and make a SL saving by using the candle as the SL position rather than the range.

Foot note to readers. Please do not take this as trading advice. This is not a trading recommendation.

 

[JJP]

and that strategy played out in the ranges formed today in EUR/USD

• London open: Loss
• Interestingly a mid-morning Head and Shoulders. Breakout candle at 10:35. Win. Hits Head & Shoulder height target.
• Asia break not traded as was in the H&S trade and too close to US Open. But was not triggered, close call ! Is a loss
• US Open. Win. Trailing stop out at 11300. Moved up based on swing lows and not deviation.
• London Close: Not Triggered. Also lucky escape.