Always Know Your Plan
Apart from bankroll management, there is very little that is more important to being a successful trader than having a solid game plan. In fact, conventional trading wisdom states that a trader should actually have three plans in place: one for if the price moves up, one for if the price moves down, and one for if the price moves within a sideways range.
Fortunately, there are many situations where each of the 3 plans is relatively routine and formulaic, making it easy to learn the basics and apply over and over again. Because if there's one thing that makes trading less stressful, it's knowing exactly what you want to do regardless of where the price goes. That's why, when considering taking a trade, it is extremely helpful to outline the process ahead of time, thereby avoiding the dreaded emotional trading that has claimed so many trading-lives along the way. Let's take a look at one such scenario, where price is hovering below a long-term resistance line where we're looking to catch a breakout.
Plan #1 - Price Goes Up
In this situation, you have two primary options, buy the breakout itself or buy the pullback.
Buying the breakout:
The most important aspects of buying the breakout are managing your risk and worshipping volume. Although these days I personally prefer using 'triggers' (aka stop-runs) to enter trades, if there's one thing that can get me excited about breakout trading, it's volume.
I once heard someone say 'no good breakout has ever started without massive volume' and although I'm not sure trading can ever be as definitive as that, volume-analysis is most definitely a key part of my trading plan. For me, that means that before entering a breakout trade I'm looking both for increasing buying action, as well as significantly declining selling-pressure in the final couple of pullbacks as price approaches the resistance zone.
Once I've entered a breakout trade as it pushes through resistance with volume that's at least 2x (and preferably 3x+) the size of volume over the previous day/week/month depending on what timeframe I'm trading on, I place my stops a little ways below the final pullback. It's important to make sure I give it enough room to not get tagged by the eventual retest confirming resistance has turned into support. Alternatively, some traders choose to put their stops all the way below the accumulation zone, but I personally prefer to get closed out and rebuy the bottom of the zone if price-action warrants it, rather than holding through the entire ride. As I've written about before, capital preservation and minimizing losses are my primary concerns when trading, so I'll gladly take a bunch of small papercuts to avoid having my proverbial arm chopped off.
Buying the pullback:
Although most pullback-traders place their buys on the just-broken-through resistance line, I prefer to wait for the second pullback instead, even if it means I miss a small percentage of the move. The reason I like doing it this way is because market-makers will often use the first surge after the pullback as a final liquidity pool to dump their holdings, after which price will collapse back into the range it just exited (aka a 'fake' or 'failed' breakout). By allowing the pullback-traders to test the waters on my behalf, I can often fade these failed breakouts and focus on entering trades where the first line of defense has already been tested and confirmed. When buying the pullback, patience is always the answer.
Plan #2 - Price Goes Down
Assuming you are long-centric (meaning, a buyer as opposed to a seller or shorter), price moving down from an important level makes your job simple as can be; simply set alerts at the most recent support level if you are interested in buying the dip, as well as at the just-failed resistance line if you are a breakout trader, and move on to another coin or stock until one of those two levels is hit. Easy-peasy.
Plan #3 - Price Goes Sideways
As much as I love a good bull-run, some of my favorite setups, both on the long and short sides, are in sideways action, otherwise known as a 'range'. Open up any crypto chart and you'll inevitably see the two types of price actions defined by RN Elliot (of Elliot Waves fame) of 'impulse' and 'corrective' waves, with the former referring to a sustained move in one direction and the latter generally being a shorter move in the opposite direction. Although this usually refers to price-action that is trending, I've found value in it during sideways action within a well-defined range as well. If you've ever seen a price analysis chart where all the candles are contained within a large rectangle, you've been looking at sideways-action, or a range.
The reason I love ranges so much – as opposed to a trend where resistance lines are up for more interpretation – is that they have very clearly defined edges. Each time price reaches either the top or bottom of the range, the action reverses and begins heading in the opposite direction, often quickly and violently, particularly when returning to the downside.
In these situations, my approach is fairly basic: analyze the higher timeframe chart to determine if the coin or stock is predominantly bullish or bearish and buy reversals just outside the bottom of the range (this is the area market-makers target for stop-runs) for bullish continuations, and sell just outside the top of the range in bearish scenarios. When doing so, I make sure to keep in mind two crucial elements of trading ranges: never chase a reversal if it doesn't make it to your buy-order (if you've set your levels properly your order will likely get filled eventually anyway) and always set stop-losses a little distance away from where your trade-idea would become invalidated.
By staying vigilant with your technical analysis and always having three plans in place for when the price moves up, down and sideways, you will be ready to deal with each scenario as it materializes without needing to make high-pressure emotional decisions. Not only will eliminating the indecision that comes with trading on the fly help you protect your bankroll, but it will make trading a whole lot more enjoyable and less stressful, so consider using this type of measured approach the next time you feel the urge to hop in a trade unprepared. Trust me, your bankroll will thank you for it!
Yaniv Son is a former poker professional and current student of day trading and cryptocurrencies.
Find him on Twitter @vancityyan