Category: Risk Management

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Entry Triggers on the Lower Time Frame

Entry Triggers on the Lower Time Frame

Above, is a good framework of what to look for on the entry/trigger time frame (short trade). If MACD crosses down through Signal line on the break of the uptrend line (red trendline), step 1 in a change of trend; then on step 2, it should setup some version of a pinch play which is where the 1st entry arrow is pointing. 2nd entry arrow is the MACD crossing down through the Signal line. Last arrow is the break of the 40 MA line. Entry 2 and 3, at times, will happen simultaneously so it is important to understand the concepts below.

Keep in mind, we do not know 2 is 2 until it turns down. Do not pick a top. Either wait for MACD signal or go down to a lower time frame for the trigger. In addition, the target area is typically based on the swing tops and bottoms on the Trend time frame (Trade-able time frame) which is one time frame above the trigger time frame. I always prefer looking for 3:1 reward to risk or better on my trade setups. Using this approach is a good way to filter out bad entries as discussed below.

When a trigger signal develops, it is important to recognize how many bars down from the peak the stock has moved. Entry on bar 1-2 are best (YES entry example is day 2). Entries after 3-5 bars down (??? entry example) have greater risk to the stop and have greater risk of moving against you first before eventually moving in your favor. This can be very uncomfortable psychologically.

2 Time Frame Pinch Play with entry, stop and target.

2 Time Frame Pinch Play with entry, stop and target.

I have provided an example of a short sale signal using the 2 time frame pinch play from my book “Invest Like a Pro”. Risk management is of paramount importance when doing trades of this type. In order to be successful over time, you must be very strict about the loss side of the equation. If you just buy because a stock looks like it is going higher or you sell (short) a stock because it looks like it is going lower, i believe you will struggle to be successful as a trader. By refining your timing, you will improve your reward to risk equation which will increase the odds of success. The 60 minute and 10 minute charts of AT&T (T) below show how to improve your timing and entry as well as reduce your risk in a trade.

60-minute chart higher time frame:

Here is an example of how this approach can be used on two intraday time frames.  Above, we see the 60 min chart triggered on the gap down at the open.  If you shorted at the open you would need to put your stop above the peak from the prior afternoon around $24.70.

10-minute chart lower time frame:

I left the circled area from 60 min on the 10 min chart so we can see the timing of the trigger.  The timing and reward to risk equation improves dramatically by moving down to the 10 minute chart and waiting for a second pinch. Notice how the trigger took place before a big extended move.  That is important when the higher time frame qualifies via a gap.  Target was hit by .04 before turning up. So, by waiting for the lower time frame to provide a more timely trigger and stop, we were able to hit a 3-1 reward to risk target in just a few hours.

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