How To Use Price Action Structure To Find Proper Stop Placement
If you have read any of our day trading manuals, then you should know and understand that we have some basic rules that we use and follow. Often times though, people monkey around with those rules and make ever so slight changes to them, and then they wonder why they are not having success. The first rule of our price action trading course is that you do not change the rules. Today we are going to talk about how to use price action structure to find proper stop placement. While adjusting this rule in any way might seem like a trivial thing, I can assure you that making any changes to it will affect your trading outcome, and it will definitely be a negative effect, so if you don’t learn anything else from our website or trading manuals, learn that the rules are written for a specific reason. These rules have been perfected over time in order to give us the best opportunity to be profitable day traders.
Let me now explain how we use the price action structure to find the proper placement area for our safety stops. Also, be sure to watch the video at the end of the article for further clarification. First, we always trade with a safety stop: Always! There is no exception to that rule. Secondly, we never use a stop that is larger than two points or eight ticks in the ES. Different markets might call for a slightly different stop size, but in the ES, we never enter with more than a two point stop if we are day trading. If you were to go to a larger chart in the ES, the stop size might actually need to be adjusted, but we are talking about trading a 2000 tick or 5 minute time chart in the ES for now. Once we get a set up at one of our key entry points on a chart, we then begin looking for a signal bar to form and close, which is simply a completed bar that is signaling us that prices are setting up to move in our desired entry direction. We are only interested in set ups that are at key entry points, so ignore other set ups and you will immediately eliminate a lot of your losing trades.
These signal bars are normally the last bar that forms at an extreme in a correction in a trending market, or else they form at the far edges of strong support and resistance in a ranging market. If you are reading the price action correctly, this will be the case in most every instance. Once your signal bar forms, you simply place a stop order one tick above that bar when going long, or one tick below that bar when going short. If the order is not triggered, and prices don’t do what we expected, then no harm done and we can simply cancel the order and reevaluate and look for a new entry point. Assuming your order is triggered, you then proceed as follows with your safety stop. If going long, your stop MUST be below the signal bar, and if going short, your stop must be above the signal bar.
Ideally, you want to place these safety stops a tick or two above or below your signal bar. It’s critical that your stop go above or below the signal bar though, because this will allow your stop to be protected somewhat by the price action structure itself. There is a reason that prices turn at these locations, and that’s because they get overwhelmed by sell orders when correcting in a down trend, or overwhelmed by buy orders when correcting in an uptrend. We want to use that fact to help protect our safety stops. If your reading the price action properly, it will be very rare that prices will break above your signal bar unless you were just wrong, there was a trap set, or some unexpected volatility suddenly hit the market causing an emotional surge. News events will do this on occasion, but we also don’t enter new trades right around big news announcements for this very reason.
Hopefully it’s now clear that your stop must always go above or below the signal bar. There is a very logical reason as discussed above. There is an additional rule that goes along with this though. Your stop must never be more than 8 ticks or two points. If placing your entry stop just above or below the signal bar will result in your stop being larger than two points, then you must find a different way to enter the trade or else skip it. One way of getting into the trade might be to drop a limit order further back into the bar at a location that doesn’t break the two point stop rule. Sometimes this works well, but other times prices will not pull back far enough to trigger your order and you get left behind, but this is preferable to taking a large loss of more than two points. It’s another critical piece to the rules, so do not alter it.
Let’s recap the rules again before wrapping this up.
– Our stop must always go above or below the signal bar.
– Our stop must never be larger than two points or eight ticks
– We almost always want to enter our trade using a stop order one tick above or one tick below the signal bar once it completes.
– We never try to enter early on a signal bar, but rather we must wait for it to complete. If you try and break this rule and enter early, you will get tricked or fooled often only to see the bar close looking much differently than you expected.
It is mission critical to your trading success that you follow our rules on how to use price action structure to find proper stop placement. Any deviation from these rules will change your outcome in a negative way, this I can assure you. We have spent many years honing this process and working to find the right combination of techniques and rules that will give us the best chance for success, so changing anything or trying to adjust the rules is only going to set you back in time and money, so do not attempt it. If you are interested in learning more about how we use price action trading to make a living in the ES, you can find that information at http://priceactiontradingsystem.com/pats-trading-manuals.