Once an entry is initiated at a SE/BE the most straightforward way to book profits is when TT generates an opposite signal. For example, if an entry is taken at a SE, if the market bounces and a BE is triggered, that would be a good spot to book (at least partial) profits.
As a general rule, when playing a SE/BE reaction, the SL should be set 3-5 points below/above the SE/BE level. When the market is volatile (as we are experiencing after the Corona crash), that changes to 5-7 points. If the SE/BE is spiked and the SL is triggered, another attempt can be made, once the SE/BE is recovered (if that is the case). In this situation the SL can be set 1 point below the previous spike low/high.
The chart below shows a few examples of how the entries and taking/protecting profits can be approached.
At point 1 the market triggered a SE with a seller capitulation bar. The entry could have been initiated either on the initial reaction, just after the cap bar (where entry 1 shows) or at the back-test which was text-book (OR entry 1). In both cases, the SL should be set at 5-7 points below the SE. The price bounced nicely until a BE was triggered at point 2.
At point 2, the BE was not a great entry short because the % strength was rather weak (at 33%) and also it was very close to the maginot line (ML). When that is the case, it is important to watch if the initial reaction can break the ML. If it can’t, it’s likely that the exhaustion won’t hold. In the present case, the ML held and a breakout was attempted before a whipsaw that tried to break below the ML and failed, which led to a breakout of the BE. So the BE at point 2 was not a good entry short because of these reasons, however it could have been used as a signal to take profit from Entry 1 (from SE at point 1). If that was not used as TP, then either the 2nd BE (point 3) could have been used for TP1 or the green TL (from back-test low to the widest higher low), which would have resulted in taking profit close to the 2nd BE.
At point 3, the 2nd sequential BE was a good entry for shorts (additionally to taking profit from the long at point 1 SE). A 2nd sequential exhaustion has high odds of holding. Additionally the 400 bar MA was just above. Considering the 1st bar after the confirmation spiked slightly the BE level, the back-test would have been a lower risk entry. The SL could have been put either at the usual 5-7 points above (which was coinciding with the 400 bar MA) or 1 point above the 1st spike above the BE (for a very tight stop). Considering that the ML was still quite close from there, reaction to it needed to be watched carefully because if that provided support, the next bounce might have been an attempt to break the BE. ML provided a brief bounce before it was spiked and for those wanting to let profits run a TL drawn from the spike back-test of the BE to the next lower high could have been a good way to risk manage the trade (show on chart and where SL2 would have been triggered, in profit of course).
The ML did provide support after a brief spike below and regaining the ML did lead to an attempted breakout over the 2nd BE, as indicated above. The breakout failed at the 400bar MA just above, and price came back to bounce again off the ML.
At point 4, another BE was triggered. That was a good RR entry for shorts for several reasons:
- the market attempted a breakout over the previous BE and failed (bearish)
- the BE was a 3rd sequential BE in the same price area (strong resistance and higher odds of holding)
- the BE triggered on a lower high vs the attempted breakout high and right at the 400bar MA.
An entry could have been initiated on the initial reaction or at the back-test (on chart - OR entry 3). Stops 3-5 points above the BE lvl or 1 point above the high of day (attempted breakout high).
The entry off the back-test had no emotions of being taken out as price just slid down, sliced through the ML and just kept going. Nevertheless a TL to risk manage the trade (as shown on chart) would have worked nicely.
There was no real reason to get out of the entry3 short until the market confirmed the next SE (which triggered at the previous SE lvl, but confirmed much lower). After it confirmed, there was an immediate strong reaction with the next bar moving almost 10 points. Coincidentally the SL3 from the green TL would have triggered there on the next bar. A nice 35 point trade.
At point 5, with the confirmation of that SE, another entry could have been initiated. Initial reaction was strong and for those who missed it an entry on the back-test (on chart - OR entry4) could have been initiated.
Considering that the market had bearish momentum (from failed attempted breakout and from break below the ML), profits should have been protected aggressively on entry4. Either the 10 point rule (taking profits 10 points above) or the green TL (shown on graph). As can be seen the bounce off the SE failed and a huge sell cap bar was triggered which back-tested the SE again, before another big bounce which also faded and mkt closed close to the SE lvl.