Trading With A B C Corrections And The Low Risk Entry
Trading With Corrections
There are hundreds of ways to enter and exit the markets – in fact it has been observed that even people who are taught exactly the same methods often end up trading slightly different variations of those methods – using ones that suit their personality more than others.
There are two things we should look for when finding an entry method – high probability and low risk. What I mean by low risk is an entry that has as small a distance as possible between the entry point and the stop loss. This actually allows us to buy more shares with the same amount of money we would normally risk. And when we buy more shares, we have the potential for greater rewards when the market moves in our favor.
I should also tell you, this is a fairly advanced technique where we will be using many of the techniques we’ve learned so far, so please feel free to also use the Free Trading And Investment Course to get up to speed if needed! Or if you want something a little more specific, you can brush up on your risk management info in the article on CFDs, and the article on money management before moving on.
Higher Probability and Lower Risk
So, how do we find these seemingly impossible entries, with high probability AND low risk?
There are two parts to finding them – the A B C correction and what is called the “Trader’s Trick” entry. Let’s start with the A B C correction.
The A B C Correction
This is where we have a confirmed trend (for more on how to confirm a trend, check out Trading with Dow Theory and Trading with Trend Lines) but then price stops and starts reversing against the main trend in a “3 wave” or A-B-C correction. You will find it creates a similar look to a continuation pattern – and that is the basic idea – we get our 3 wave retracement against the trend, before breaking out and continuing the main trend.
As always, I find a picture speaks a thousand words, so click the picture below to enlarge:
Easy enough to spot. But we will take the analysis of the A B C correction even further by adding price extensions to determine where the correction might stop and continue the main trend.
To do this the third wave, or the “C” part of the correction, is usually 75% to 100% the distance of Wave 1, or “A”. So once we are in the C part of the correction, we can start looking at our price extensions for a place where the correction might end. Let’s check it out:
You can learn more about price extensions here – it will tell you the percentages to look for after 100% if needed. And now, it brings us to the second part of our strategy – the Trader’s Trick entry.
The Trader’s Trick Entry
This is one I learned from legendary Australian trader Nick Radge, so all kudos to him. He’s a great guy and always willing to help out new traders (in fact I find the more successful the person, the more willing they are to help others).
The idea behind the trader’s trick entry is to find one single price bar where we will put our entry at the top of the bar, and our stop at the bottom of the bar. The ultimate “low risk entry”. And we can do this with a higher probability by using it in conjunction with the ABC correction, the price extensions, and waiting for the time when they all match up.
But What Kind Of Single Price Bars Do We Look For?
It is simple. For a bullish entry (an up move) we are looking for a bar that trades around the price extension but then closes on its highs. In other words, the tick on the right of the bar (the close) is in the top third of the bar. For a bearish entry, we are looking for a bar that closes in the bottom third.
Here is a closer picture of a single bar, or Trader’s Trick entry, and then a sample of putting it all together. Click the pictures to enlarge.
I should note that in order to increase your probability of success even further, the market should be traveling in your direction in the short term. For more info on how to determine the direction of the overall market, click here.
So, to summarize, we:
1: First determine the main trend
2: Then wait for an A B C correction against the main trend
3: Wait for the “C” leg to stall around 75% – 100% of Wave A
4: Find a single bar entry that closes towards the direction you want to trade.
5: Make sure the overall market is traveling in the short term direction you wish to trade.
6: Set your entry at the top of the bar (for long entries) and your stop at the bottom of the bar.
7: Enter the stock and manage your trade.
So there you have it! If you got through this article I congratulate you – it contains many more advanced techniques, but can be worth it in finding that one huge trend that really balloons your trading account with a small “risk” and a large reward. Please, test it, go back over history and see if it works for you. If it works for you, then great! Go and give your trading account a boost.
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July 18, 2009
Tags: Enter and Exit Posted in: Free Trading Course Lesson Backlog
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