Having conviction in your forecast of market direction and trade setups is important, but it also is dangerous. Developing as a trader requires that you find a balance between a strong conviction that allows you to hold through pullbacks and a willingness to let go of a trade or a market forecast once the market shows an unwillingness to cleanly move as you predicted.
Additionally, a large part of successful trading it timing. You can be absolutely right in your forecast of direction and yet still blow your account.
Today I’m going to show a sequence of trades I took where holding too strong of a conviction of future price movement got me into trouble. This was not my finest hour but is a great teachable movement for a variety of reasons we will discuss below.
Let’s start with the big picture. The solid green line is Fridays HOD, and the solid red line is Friday’s LOD. The Dotted green line is the overnight HOD and the dotted red line is the overnight LOD.
This sequence happened on a Monday 30 minutes into the trading session. As you can see from the 5 minute chart price held in tight consolidation near Fridays high then dropped strongly in the early pre-trading hours. The overnight low was created shortly before 5am. Price then rebounded from the low and spent the next 3 hours hovering around Friday’s LOD.
At the open price briefly popped up above Friday’s LOD only to immediately reverse. As a general rule I don’t trade the first 30 minutes of the session, but today there were several strong set-ups so if I had been at my computer I might have taken a short or two on the pullback to Friday’s LOD.
However, the focus of this post starts about 30 minutes into the session. As you can see from the 5 minute chart price has driven lower on a very large bear bar. At this point I had high conviction that price is going to reach the support level represented by the overnight LOD (the dotted red line).
As you can see from the next chart I was absolutely correct. Price reached the support level and broke through by a tick or two before reversing up strongly (incidentally, this touch of support ended up being Monday’s LOD).
But being correct in the forecasting of future price movement is only part of the battle. What I want to discuss here is what happened between the large bear bar at 9am and the point when price reached the support level 45 minute later.
In the next couple of charts I am going to drop down to the lower time frame charts I enter trades from and take a closer look at the price action and the trades I entered and discuss the good and bad like how expectations and conviction colors risk assessment and how timing often is the difference between a winner and a loser even when the trader’s forecast of price movement is correct.
I took a total of 8 trades with each entry consisting of a all in 2 contract entry. I take profit on one at a 1:1 ratio and hold the second for a discretionary exit.
The 3 charts below are of the exact same time period, they just offer slightly difference perspectives on the same price action.
Trade #1
As you can see on the 1 minute chart price fell strongly. My expectation was price was going to immediately fall to the support level and believe there was going to be minimum to no pullback. I enter on the first stall at 9:07. This turned out to be a premature entry as after stalling briefly price spiked up much stronger that expected. -34, -33 ticks.
This first trade was a poor entry in retrospect. I was too committed to my belief that price was going to quickly fall to support and I gave into a bit of FOMO. The better trading decision would have been to insist on a better entry even if that meant missing the move.
Trade #2
I still had a strongly conviction for this move and because the move up was so sudden I considered it a n upthrust and re-entered short again at the top at 9:08am.
This was a much better discount entry than the prior trade. I was sitting at what I believed was the high of the pullback before price crashed down to the support level. Alas, I was wrong price consolidated briefly before stopping me out. -20, -20 ticks.
Although, this trade ended up a loser, it’s a trade I am satisfied with in retrospect. I sold into the upthrust and got what ended up as a very strong discount position. I was stopped out by a tick. These things happen. Sometimes your good trades are losers and sometimes you have a great winner that was actually based on a terrible trading decision.
At this point I was closing in on my personal warning zone. I would allow myself one more trade. If it was a loser I would be done for the day. However, I still was strongly convicted that price was on its way down to support.
Although, I had been stopped out, price was displacing no strength to the upside
Trade #3 and #4
Immediately, after I was stopped out price finally broke as I had hoped. I entered short on a pullback entry at 9:12am. This was a much more technically correct entry. My first target was hit before I could move it to the swing low so I reentered again. At this point I had 3 contracts on. I exited all 3 when price broke the swing low then stalled briefly. +19, +79, +58, +42.
I took profit aggressively at the pause at the swing low, because I was down for the day. However, I still believe price was going to continue down to support. I believed this consolidation at the swing low was simply a brief pause before a continuation lower.
Trade #5
Price made a micro pullback (this is most clear on the 30 second and 666 tick charts). I liked this price action and entered short at 9:13am. Price bounced at this low instead of continuing lower. -39, -40 ticks.
This trade is harder to call than some of the previous trades. If the trade had worked, it would have looked like a great reentry on a slight pause as price broke a swing low. In the end I won’t fault the trade concept or the entry.
I had a reasonable basis for my entry, but what I will fault is the management of the trade. The loss was too large. The only rationale for a re-entry on a micro pullback is a quick continuation of price. That didn’t happen. Price stalled and I allowed it to pullback 40 ticks.
Trade #6
Price had popped up, but immediately reversed without breaking the high of the prior pullback. On the 1 minute chart it created a beautiful engulfing candle pullback entry. This looked like the move, finally! I entered short at 9:18am. I took off the first contract at +22 and held the second contract confident it was going to reach support. It never did. Price consolidated and slowly crept back up towards my entry. I exited begrudgingly in disgust at +7.
Trade #7
This is where emotions come into play. I was disappointed price hadn’t given me the easy winner I had anticipated upon entering the pullback on the large engulfing. I had reluctantly exited, which was the correct thing to do as price was not behaving as anticipated, but looking back I felt the move I had captured was insufficient given the entry signal so I jumped back in at 9:21am when price dropped after my stop out. My entry was right at the low of the recent congestion and price rebounded higher. -31, -40.
Recap and Review
Done for the day! Not my finest hour, but instead of walking away with the sour taste of missed opportunity and wiping my memory clean of this dumpster fire of price action trading what can I learn from this experience?
For the day I ended -$137 with commissions. Not terrible at all as far as losing days go, but disappointing, nevertheless.
I need to examine my conviction level during this trade sequence. I was very strongly convicted on market direction during this trading sequence and ultimately my forecast was correct. However, I was completely wrong price was going to achieve that move to support.
Although, the first trade can be faulted for an early entry, it and the next two trades were consistent with a belief that price was going to move swiftly to the support level. Price displaced a strong initial move and then a shallow pullback. Given the strength of the initial move down the expectation was that the move after the pullback would also be strong and price should have reached support three or four bars.
Yet price stalled after barely breaking the low of the initial move. This should have given me pause. Price was not behaving as anticipated. When price does not behave as anticipated, especially when the anticipated move is fairly clear that is a warning sign and a good time to stand aside.
Notice also that the last three trades were all entered at the lows of congestion. These were not discounted entries, and each was at or near the LOD for the session at that time. The trade at 9:18 based on the engulfing candle gets a pass here, as this was a strong signal that displayed strong momentum, but the other two trades were entered at the lows while price was consolidating.
As a trader you must anticipate and accept that some days you will underperform. While that is disappointing, it’s to be expected. What is important is to make disappointing days into learning days. Review your trading sessions and sequences of trades. There is a lot to learn from even the most disappointing of trading days.