Trading Into Stop Losses

You can trade into stop losses, but it's usually better to wait and enter on a retest of where prices broke out.
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We just have a quick question here from J.P. asking whether we would advise to trade into stop-losses.

This is certainly something that you can consider if and when the opportunity arises. I think, if you have a look at the anatomy of a technical breakout, let’s just take something like the S&P, the anatomy of a purely technical breakout as you often get that initial push to the upside, and then just a massive acceleration after we break through a particular level. And I think that is exactly what’s happening at those type of levels.

So I think that’s exactly what’s happening at those levels. We know from looking at swing areas and just thinking about stop-loss placement, let’s look at this level on the S&P and imagine that we try to trade through this particular level. Let’s maybe move that up, technically a little bit.

So imagine that we try to trade for this particular level. We know that many traders will be having stop-losses, just above that type of level. They would love to anchor these stops above the swing. So when you are approaching these key areas where you think that traders might be keeping their stops and you have that particular bias for the instrument to continue, that can give you some additional momentum to trade.

If these stops are taken out, you should see that initial push to the upside. So that can be something to trade out of that particular level. I think it will come back, more so, to the type of trader that you are.

So more aggressive traders really like using or trading breakouts like this as they occur and then to try and catch that initial jolt to the up or to the downside as the key levels fold.

Personally, for me, I like the more classic breakout and pullback entry. So in this type of example, if we use the same one, now I would much rather prefer waiting for the break than waiting for that classic breakout pullback re-entry type of entry for me. I really like those type of entries. And the main reason for it is really simple, but it’s twofold. Firstly, it usually gives me a much better entry from a purely level point of view. So, instead of entering right above the level, or right on top of the level, you normally get a chance to get a much better entry on that second move to the downside apart from waiting for the stops to fold.

So I like the fact that you get a great entry and the retest and the continuation of that move is a pattern that I’ve often, often associated with more confirmation that a specific area is really important from a technical point of view because you mark out the level, you know it’s a significant resistance. But this type of pattern for me is just that confirmation that, you have the right level in mind, the market is rejecting from that level as anticipated. So I really liked that, but that’s from a more conservative point of view. It’s really just the way that I like to approach the markets.

But absolutely nothing wrong with that type of a strategy, trying to capitalize on that push to the upside as the stops get taken out. I think a good example recently on that was on the Euro/US dollar, where we had that key break off that 1.1150.

So we had that key level at 1.1150 and, this was just a classic, classic, classic breakout from that key level. And we saw it accelerate as we broke through that level. It just, boom, broke through the stops, took a small breather and then just accelerated to the upside. And unfortunately with these type of entries, unless you looked at that as the new floor to pullback to and into reenter, with a breakout pullback type of entry style, you probably gonna miss that type of entry.

So this is a good example of when that type of thing will work because it’s a key level and lots of traders will be looking at it. And the moment that thing falls, you just see that acceleration to the upside and same happened to the to the 1.12 as well when we had that break. So lots of traders are obviously looking at these levels.

So I think it’s a great strategy to incorporate. I think it can be interesting approach that you can take, especially if it’s levels that you know the market is gonna be focused on. So using that info to your advantage with this type of strategy can be something quite interesting.

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