It's true that failed trades sometimes can teach us more than successful trades, especially if we take the time to learn what went wrong - as in "Did I make a trading error" or "Did the market do something unexpected?"
There was a particularly high probability trade set-up that triggered late Friday afternoon that failed due to the afternoon surge, but there were a few hints and lessons we can learn from this experience, so let's take a look!
First, we'll start with the @ES (SP-mini futures) contract 5-min chart:
This is a simplified chart of the @ES with the 3/10 Oscillator and NYSE TICK as lower panel indicators.
The main idea of this trade set-up is a type of Bear Flag intraday where the goal is to get short on a move into overhead resistance (such as the 20 EMA) and trigger entry when a reversal candle forms (like the doji that peaked at 1,048 at 1:30 CST).
This retracement rally came after a new momentum (3/10) and TICK intraday low, both of which forecast lower prices are expected due to the increase in downside momentum and selling pressure.
For reference, this trade set-up was similar in structure to the 11:30am ‘bear flag' rally into the declining 20 period EMA that also formed a doji reversal candle at resistance after a flag-like retracement to the 1,056 level.
Aggressive trade entries are taken at the upper resistance line while conservative entries are taken - with confirmation - when price breaks under the lower trendline.
As such, at 1:30, a short-sell is triggered with an entry as close to 1,048 as possible while placing a stop one to two points (depending on your strategy) higher than your entry.
The minimum target was a retest of the intraday low at 1,040 or - preferably - a new swing low that would end under 1,040.
So we enter the trade and wait...10 minutes later, we are already in the profit zone by 3 points ($50 per contract)... but something unexpected happened!
Price rallied slightly higher, paused, and then took off suddenly and stopped us out with a small loss.
Of course, I want to know if there was any way I could have foreseen this trade failure, or any lessons to be learned.
It turns out, there were!
Let's see the 1-min chart and learn a valuable lesson about bias, neutrality, and reading market internals.
The Red "S" and arrow at 1:40 represent an ideal entry when the 1-min trendline was broken after the 5-min ‘doji' formed (reference both charts).
We also saw a slight negative TICK divergence leading into the 1,048 high - that's often only seen on the 1-min frame.
So as price rallied off the 1,044 level, it was no big deal because our stop was safe at 1,049/1,050 (depending if you prefer tight stops or not... remember we are playing for at least an 8 point target to the downside).
At 2:02 CST, something powerful and interesting happened that was either ignored by traders with a "The Market HAS to Go Down" bias or not seen by those not watching internals closely.
Price formed a New TICK high on the session which corresponded with a 20,000 print in @ES Volume - interesting.
These are "Hidden" Signs of Strength (new TICK highs when price is far from making an intraday TICK high) which forecasts reversals and bullish strength yet to come.
I have little green dots on my TICK charts to clue me in when we are making new intraday TICK highs - that's very important to know.
Why?
Because we can't let our bias (that "This trade HAS to work!") cloud the reality of the growing bullish/buying power coming into the market.
Exactly 5 minutes after this "Shot Across the Bow" (which should have triggered you out with a stop-loss), price surged in an impressive power buying (short-squeeze/covering) rally.
This was forecast in part by the New TICK high and failed high-probability Bear Flag set-up.
Very aggressive traders could have flipped their position long and bought, taking advantage of the buying power and short-covering rally... but that's another story.
Here are a few helpful lessons we can learn from this failed set-up:
1. Remain Flexible - do not let your bias ("The Market MUST Go Down") cloud the reality of what's happening
2. Seek High Probability, Low Risk Set-ups
(In this case, we had the trend, resistance, and a doji working in our favor, and were risking 2 points to play for 8 points)
3. Take Your Stop-Loss when the Trade Fails
(You would have been in a worse situation if you stubbornly held short into the sudden 10-point rally)
(In fact, some of the largest swings occur AFTER a high-probability set-ups has failed ... I call this "Popped Stops")
4. "Anything Can Happen" in the Market (Mark Douglas)
Even the best set-ups can ... and sometimes do... fail and that's perfectly fine as long as you control risk.
Don't blame JP Morgan's Buy Desk or Goldman Sachs - trading is a game of probabilities instead of certainties.
Study each day to learn more concepts and do your own end-of-day analysis of the charts to make yourselves even better traders!