Anyone that follows our work is probably already keenly aware of how we like to day trade second entry setups, particularly when they occur during a strong trend. Second entries are actually a very high probability price action set up that we teach. However, today we are going to talk about a different way of using these two legged corrective patterns. Using price action to day trade failed second entries works so well and is such a reliable trap pattern that we recommend trading it almost any time you see it setting up. Just in case you are not familiar with second entry patterns, you can read more about those by following the link and reading about them. If you don’t know what a second entry is already, then you will likely need to read that article first, or this information I am sharing today may not be completely clear for everyone reading it.
If you don’t know what they are already, hopefully you have read the information on second entries and now understand that they are an easy to spot trading pattern that is based on sound price action trading principles. These patterns are very reliable and rarely fail if you follow our price action trend rules properly. Normally when a second entry does fail, it’s at a location in which one would expect this to happen if you are adept at reading the price action and understanding how prices operate. As an example, let us assume that prices are in a down trend and suddenly the trend line is broken, and then followed by two legs down to a new low. Using our price action rules, we would now understand that a correction is coming soon most likely, so we must now be very careful about taking any further shorts without an almost perfect short set up.
Instead of looking for more with trend second entries shorts at this point, we would probably be better served looking for failed second entries with the trend, as this is often a sure sign of a reversal. When you see a failed second entry in a trading range or after a trend line break followed by a new extreme, this pattern will almost always lead to a great trap and a perfect place to enter in the direction of the new trend. Many times these failed second entry traps are good for only a scalp, which is our minimum expectation, but other times they create strong reversal trends and we can use these traps to get on board with a new trend very early with the chance to make some great profits on our runners or swing portion of our trade.
In actuality, it doesn’t really matter where these failed second entries appear, they are almost always a great trap pattern that will allow us the perfect opportunity to make some easy money. For today, we won’t spend to much time discussing when you should or should not trade a failed second entry, but instead, I will simply try and describe what they will look like. Let us assume that prices are trending lower, and suddenly prices find support and start trending up off a new low. The first attempt to go lower again is our first entry, but assuming prices don’t make a new low and turn up yet again, when and if they turn down a second time, that is a true second entry short. But, what happens if prices don’t reach at least a scalper’s profit on the second entry short, but instead, turn quickly higher and start moving up again?
That’s a second entry trap! The idea is that if prices break higher above any bar before reaching a scalper’s profit on the second entry short, then it is a failed second entry short. It’s a failure if and only if it breaks a tick higher above any previous bar’s close before reaching a scalper’s profit, which of course is 4 ticks of profit using a limit order to exit. You enter the short trap or new long on a stop that is placed just above the last closed bar and that order is placed if and only if prices suddenly reverse and appear to be attempting to break higher. If prices do not break higher, but then turn and go lower again, we simply cancel our long order and no harm is done, as it’s not a failed second entry until prices actually break higher. You can just reverse this for a failed second entry long, in which case it would be a long trap in which you would want to go short.
Describing this information is often hard to do and even harder to visualize, so I am going to include a video of a trade example in which I trade a failed second entry short. This long trade was a live example that I recorded on 9/16/2013. Notice that in my trade example, a second entry short triggers, but then almost instantly reverses and moves higher. While most of these traps will happen very fast, this one took some time to complete, so be aware that it was slow in completing. In the majority of cases, these traps take only a few second to a minute to complete the scalp portion of your profits, because so many trapped traders will be exiting as soon as they realize that they were fooled, and as prices hit their safety stops, it quickly pushes prices onward to fill your exit limit orders. You are in essence using their exit orders to quickly push your trade to a scalper’s profit.
If you understand how traps work, then you won’t need any explanation on why these failed second entries work so well. However, regardless of whether or not you understand the reasons as to “why” the trade works, hopefully you can see that by using price action to day trade failed second entries, you can actually eliminate the small percentage of second entry patterns that actually fail and improve your trading results even further in your favor. Because second entries fail very rarely, they are a high probability trading pattern for making profits, but if you consider that the few times that they do fail, you can actually use this failure to reverse into a trap, you can almost eliminate any losses at all in trading these patterns. Be sure to watch the attached video below to see a live example of how I traded one of these failed second entry shorts. If you would like to learn more about how we use price action to trade the markets profitably each day, you can find that information by going to http://priceactiontradingsystem.com/pats-price-action-trading-manual/.