Patience is an important skill in trading. But like everything, balance is important. Being too patient is just as bad as being impatient. How do we find the balance?

One answer is to think about how and where patterns fail.

The graphic above shows a trade we discussed with our MarketLife members on a daily basis. ((Register today Using the options20 code for a 20% lifetime discount). The setup pattern was attractive for several reasons:

  • We have had deals in almost all major currencies against the USD and the correlated USD exposure risk is becoming a significant problem. That cross was largely an uncorrelated risk.
  • The pattern is solid: a higher timeframe (not shown) indicates a trend change in mid-2020 for the context and …
  • The daily chart shows a formation of textbook cups and handles, which can also be viewed as a flag below a visible resistance level.

When is a failure okay?

Take a look at the bar labeled B. I was ticked into a long entry at the top of this bar and made the decision to stop despite a pretty crappy deal. (My stop was not hit.)

B is quite obviously a bug, but it is not a bug that is cause for concern. Why? Because it’s still within the pattern. Although there was some price movement above the previous high, the market simply stayed within the flag on the daily chart.

At A the situation is completely different. I commented on the evening video that this was a point where we didn’t want to see failure and that if there was no follow-up, I’d leave the trade.

As you can see everything worked out this morning and the cross exploded into my 1R profit target, but the point is that A was a turning point. Once the momentum moves in your direction and the pattern is clearly broken, failure becomes much less acceptable.

By the way, one of the things that tech traders will say is “context is important” but then often the context is poorly defined and it seems impossible to explain. This is a good example of the context. If you put the bar labeled B after A, B becomes a very bad signal indeed.

In the context, it is about what is around and in front of the particular observed pattern. This is a pretty simple and straightforward example of how to use context effectively.

What do we do with it?

In my opinion, all of this has to do with trade management. Understanding that B wasn’t actually a mistake and that C was absolutely not (C is actually constructive), then we can structure our actions so that we don’t respond to such movements.

On the other hand, as soon as we find that something is different at A, we can tighten the stop to around / just below / just above the low of A and give the trade time to work.

There is always noise and random movement in the market so we will never be 100% right with this. (This is one of the reasons why a large sample trade review must be conducted, and it is very important to avoid focusing too much on a trade outcome!) However, guidelines like these can shape how we do business and are an integral part of how a trader does business its profitability.

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