Someone once said that “your best trade is the one that makes you uncomfortable”. Going long in a market making a new contract high might fit the bill for an uncomfortable trade for many traders but sticking to a logical trading plan can help you anticipate when this makes sense and give you the confidence to pull the trigger when the time is right.
The EMini NASDAQ futures were a good example of this today. The NASDAQ has had a strong rally since early December and yesterday it stopped just below the previous contract high. In last night’s edition of Swing Trader’s Insight I labeled the Naz as a breakout trade possibility for Friday. The breakout setup meant we could look for one of two things. First, we could see the pause in the recent rally to turn into a larger profit taking selloff. Second, we could use the stall as a pause before the market resumed its rally. Which way would it go?
Fortunately we didn’t have to try to predict its direction, we could let the market decide where it wanted to go, and we could go along for the ride. This is one of the great things about trading breakout setups – identifying the setup allows us to anticipate a possible move and then it gives us a trade entry if the market does what we anticipate. (Get a copy of my breakout trading guide HERE.)
When we have identified a market where we anticipate a breakout setup, we look to enter a trade when the market starts to make a move – when it moves beyond close in support or resistance, looking for this to be a catalyst to a larger move in that direction.
Normally I start with the previous session high and low for breakout reference prices; they were where traders thought the market was “too high” or “too low”. For the Naz, the Thursday low would be a logical level to watch for a downside breakout. On the upside, however, the Thursday high was so close to the contract high that it made sense to be conservative and use the higher price.
The NASDAQ opened the day session below the contract high and started to work higher. The contact high was taken out just before 10 AM, triggering our long entry. (I like to figure out my entry and stop loss levels ahead of time and have them working so I don’t have to try to do it on the fly when markets might be moving quickly.)
After our entry, the market spent most of the balance of the session moving higher, as we often see with breakout trades. Breakout moves often produce a positive feedback loop – a market tends to generate increased momentum the farther it moves from the starting point. This positive feedback move is a major reason I preach patience with closing out breakout trades- we are often rewarded for holding onto a trade longer.
Essential Guide for Futures Swing Trading
In this guide, experienced trader and broker Scott Hoffman explains the trading methods he uses to analyze and trade the futures markets and to publish his trade advisory, Swing Trader’s Insight.
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