The general idea of my trading system is buying when price corrects to a previous resistance level after a significant volatility expansion within a longer term uptrend. Basically, what I’m looking for is an established uptrend with higher lows and higher highs on the weekly timeframe, advancing weekly EMA20, break of a resistance and price violating the weekly upper Keltner band. Only then I’m interested in getting long such stock and I start watching it every day. I draw the plan and most importantly the “Area Of Value”, where I expect already a few days or weeks ahead to enter.
Last year, when I was trying all kinds of different approaches, I discovered that to me personally it’s much more logical and pleasant at the same time to go long on support (pullbacks) instead of at break of a resistance (breakouts). I feel that I can manage my risk much more appropriately when getting in on reversals of a short term downtrend within a long term uptrend rather than entering on momentum burst. Usually, I already exit at least with half of my position where breakout traders prepare to enter (last significant high).
So far, I trade only long. Sometimes I go through broken falling price charts and mark possible entries and I believe that this system works both ways. However, given the natural behavior of stocks as a value instrument, I prefer to go long. Also, why go short when the overall market keeps putting in one all-time-high after another. We’re now in a strong bull market and I do want to ride it as much as I can. I plan to get more skilled with shorts in the future but now it’s not the best time to trade them I think.
First things first. I’ve been watching these deeper pullbacks only for last 2 months. I’m still at the beginning. However, I have finally decided what kind of market action I feel the most comfortable to trade and now I’m going to master this approach. There is still PLENTY of things I have to develop in my plan but the main one is already done – I know there is an edge in trading pullbacks and I just have to figure out how to utilize it the best I can. I have a clear goal in my mind and I’ve never felt better about my trading. No more system hopping, no more random guru following. And what’s the best way to learn a skill? Sure, a real world, raw practice.
I have a basic plan now which I started trading with my real money only 3 weeks ago after paper trading it for a month and I just keep executing all trades that fit into my plan. Sometimes I enter totally wrong, I make mistakes, I have some losses, but also some really nice wins already, I try my best now to figure out what are the appropriate market conditions for my setups, how much I’m willing to let price go against my positions, how long I can hold the winners etc. I’m patient. I’m on a journey of developing my own trading approach and I love the process. I’m building my confidence.
Trading is a skill where you must develop your own rules out of nothing in a limitless environment, test these rules and then consistently stick to them. However, at the same time, trading is so freaking random that not a single situation looks completely the same as some other one in the past. They might look similar and you may use the same rules for them but they are not. That’s probably the most challenging part of this game. When I started day-trading e-minis (funny but typical, right?) and then futures spreads a few years ago, I tried to create rules for every single situation. It was never ending because trade after trade, some new nuances ocurred that I hadn’t incorporated in my trading plan yet. I’m fortunate enough that I have finally realized that professional discretionary traders do not have strict rules for every single situation that may happen.
It’s necessary to have trading rules. But one must avoid developing them too strict, dogmatic and tight, fitted on a specific situation from the past. That would be a mistake. Professional discretionary traders know that every day in the markets is different. There are no two same days. And still, it’s possible to be consistent. That’s because there are patterns that are repeating over and over again but they do not look the same every time. The situations are similar but risk management, entries and position management will slightly differ trade from trade.
With that paragraph I just wanted to describe you my thoughts about that. Even though I have my trading rules and I set them as systematic as I can, in every decision moment I still let myself like 10-20% room to adjust the rules to the specific situation. I rely on my past experiences and I try to trust myself. I believe that discretionary trading is more of an art than exact science. To be a little specific, to me, a pullback trader, the most important takeaway is following - all kinds of supports and resistances are areas rather than exact lines and sometimes these areas get violated in order to price reacts to them only a few days later.
So how do I currently trade my Flip setups?
Trend on weekly or monthly is my friend. I never fight it. Higher lows and higher highs. The Flip pattern on its own basically ensures I’m in a trending name. Because I want to see a break of a resistance, strong rally through the weekly upper band and then the retest which means that price had to put in a higher high. How basic this condition may seem, it’s a large part of the edge I’m trying to exploit on a regular basis. My goal is to look for stocks that are in a correction stage (pulling back) of a long term uptrend. My eye is already trained, so that when I’m flipping through hundreds of charts I only stop when price is near weekly EMA20 and then I just draw the previous resistance. If it’s near both the MA and the resistance, I put it on my watchlist to plan the trade.
I’d say that 50% of my trades look like a descending triangle with resistance (which becomes a support) at the bottom and a declining trendline at the top. Price getting slowly tighter and closer to my area of value until it finally hits the support, spend there a few days, finds a large volume of buying orders, pops through the trendline and continues higher again. However, this is maybe too ideal and not all of the real world trades look like that. Unfortunately, other 50% of the trades are not that straightforward. They randomly bounce around, create new trendlines because of failed breakouts, violate the support and test the support 2, 3 or even 4 times until price resolves higher. Generally, I have observed so far that the longer the trend, the longer it takes the price to bounce and I need to prepare for more tests and more sideways action. That’s why I prefer trading the first 3 variations of Flips you’ll read about later.
Buying a deeper pullback makes a lot of sense to me. Most of the time, where I buy based on my Flip system, many more traders and investors buy as well. At the same time, shorts are drying up. Confluence is key. The more confluence there is in the area of value, the better. Most typical confluence is previous resistance, weekly EMA20 and up-trendline. However, when I plot on my charts some of other technical stuff such as widely used moving averages 50 and 200, Fibonacci retracements, oscillators etc., I find out, that if I was using them, I’d enter roughly at the same spot. That’s why I call my level an “Area Of Value (AOV)” because that’s what it is. SMA200 + 61.8 Fib + trendline + prior resistance + clearly developed uptrend on the weekly and you’re all set. Some traders say confluence is nonsense. But I feel it works for me. The more traders see the opportunity, the more buying pressure, the stronger the move. Even if not, it’s comfortable to know that more traders bought the stock at the same level as I did. And I don’t need to clutter my charts with all the various tools. It’s not necessary, price action and a few lines is more than enough.
(to see the screenshots bigger, right click “Open picture as a new Tab”)
This AOV also brings clarity and calmness to my trading. What I totally love about this whole Flip strategy is the fact that I can plan the whole trade beforehand. I see an uptrend, price pulling back, I draw a level where I want it to fall in order to become interesting for me, I set an alert and then I just wait. I am patient. I wait until the plan materializes itself. Until price drops to my desired AOV, consolidates there, maybe fake a breakdown and then pops through the trendline. It happens all the time. I just have to wait. And then wait some more until the action shouts on me it’s time to enter. I plan the trade and then just trade the plan. Without thinking, without hesitation.
1. Initial Flip after broken trendline of a large corrective move lasting from a few months to even 1-2 years – So far, this one and the Bottoming base Flip are my most favorite. They are very reliable and most importantly, they can catch the largest moves. This kind of Flip is basically the initial pullback after breakout rally from a longer-term downtrend. Situation: Multi-year uptrend on monthly. Weekly is in a corrective downtrend and ideally stops at a very strong S/R level. There it consolidates for a couple of weeks and then turns around, breaks the declining trendline and rallies. After such rally I set an alert lower on the previous consolidation where is my AOV I want to trade off and I wait until price retraces back. Sometimes, that takes a month or two. With this Flip variation, I don’t persist on the condition of price violating the weekly upper band which is too far away because price was trending down for a long time. However, it must violate at least the daily upper band. These Flips give me the opportunity to get in at the best level possible in the new developing uptrend.
2. Bottoming base Flip – This is the second Flip variation that let me get into a newly developing long-term trend at the best price possible. It’s definitely possible to get into a stock in the bottoming formation before the breakout but that’s not my style. Or at the breakout itself. But I need to see that breakout, higher high and then Flip off the bottoming base neckline. These trades are crystal clear most of the time and they tend to pop very soon after price hits the AOV.
3. Multi-month/year base Flip – Price has created a huge multi-month or even years long range. Then it breaks it to the upside, rallies and gets back to retest the resistance which becomes support that should hold in order for me to enter. This base-flip is a VERY strong setup on any timeframe. The longer the base, the stronger the resistance, the stronger the breakout and the higher the probability that if price comes back to retest it, it will hold. And there goes your “buy the flip”!
(to see the screenshots bigger, right click “Open picture as a new Tab”)
4. All-time-highs Flip – Pretty straightforward I’d say. It’s basically just another kind of a base-flip setup. No need for much explanation. I’ll just add that the longer price based below the ATH, the better. Such price action is not only good for breakout traders but for my Flips as well.
5. Below all-time-highs Flip - I was surprised after paper trading this strategy that this situation ocurres so often. Even so often that I classified it as a standalone Flip variation to measure its statistics. It happens when price attacks the ath from months ago, pulls back to a prior resistance and gets ready to attack it again and maybe even break through it. There is always a strong level just below the ath that price may flip off. I enter there and take most of my profits at the ath where breakout traders are getting ready to enter.
6. Remount Flip – Imagine a strong multi-year support level. Price breaks below it and trends down for some time (months or even years). Then, after bottoming, it starts to trend higher again and it remounts that very strong historical S/R level. It gets above it and comes back to test it. And you know the rest of the story. I enter and I milk that cow as long as it keeps going!
7. Trend Flip – Most of the time, my trades are some kind of a base-flip setup or Flip off a historically many times proven S/R level. And if not, it’s just a basic Flip from prior swing high in an uptrend. This one is the least reliable because the horizontal S/R is weak. This setup is more typical for lower timeframes because when you check out weekly, it’s probably going to be a Remount Flip.
There are basically 6 different ways I came up with to enter the Flip pattern. I use them all based on the specific price action of the specific stock I’m about to enter. The list is sorted from closest entries to the area of value to entries that are more far away from the area of value.
1. (Aggressive - not in use) Enter right at the support without waiting for a clear reversal. Maybe wait for a 3-5 days consolidation and then enter as lowest as possible. Such entry provides a much better risk-to-reward ratio (RRR) but I found out that I don’t feel comfortable trading it this way. Many times, price continues lower to violate the area of value to hunt all stops and only then it bounces. With more experience I would definitely want to time my entries lower and lower, but for now, I stick to one of the following methods.
2. (Aggressive) Enter above pinbar’s high. If price forms a candle with long wick at the bottom which violated the support intraday but closed rather strong, that’s a great signal to me to be more aggressive. In such case, I do not wait for the trendline break and set my buying stop order above the pinbar’s high. This entry provides the best RRR without the necessity to guess where price will stop. It doesn’t happen often but when it does it makes me happy.
(to see the screenshots bigger, right click “Open picture as a new Tab”)
3. (Aggressive) Buy with a stop order set above a short-term resistance. Price gets tighter and then it goes sideways for a couple of days maybe with a few failed breakouts. After being patient and wait how this resolves, I don’t need to wait for price to close above the trendline but rather be more aggressive and enter at the first momentum burst through both the consolidation resistance and the declining trendline. I like these aggressive entries the most because most of the time they provide a very robust RRR.
4. (Conservative) Wait for price to close above the trendline and then enter at the end of the day or with a buying stop order above the high of this candle. This is an ideal confirmation, however, most of the time price is already so stretched and far away from the support that it’s not possible to enter with a robust RRR and I must set a limit order to buy with a “discount” or wait for the initial flag to get in.
5. (Conservative) Set a limit order lower, somewhere in the middle of the yesterday’s candle, closer to the short-term mean. If price didn’t run that far away but I need to enter a bit lower to have a desired RRR I don’t necessarily wait for an initial flag to form. I just set a limit order and wait if price retraces tomorrow before following through. If not and it continues right away, there is still chance to get in.
6. (Conservative) Initial flag after price breaking out without giving a good RRR opportunity to get in. When price ran too quick too far away, the best way to enter such stock is to wait for the initial pullback/flag to the trendline or curling up dEMA20 (if I understood this correctly, Adam calls these “nested pullbacks”). Never chase. If I didn’t get in, I wait for this initial flag to form and then set my buying stop order above the flag to trigger the entry. This is much better than chasing because when chasing price is stretched and you would have to put your stoploss too far away. It’s better to wait for the initial pullback and put the stoploss below it. Most of the time these initial flags happen. But sometimes they run without stopping and flagging. And without me. But hey, that’s trading, you try to catch them all but it’s not possible if your main priority is to manage risk properly.
(to see the screenshots bigger, right click “Open picture as a new Tab”)
When you view my trades here at the blog or at Stocktwits you can notice that after my initial entry, a pretty substantial amount of them get back to the AOV or very close to it. That’s something I’m getting used to and comfortable with over time. If I chose to trade only these multiple tests of the support or initial flags, I’d miss tons of great opportunities. Some names are naturally more sluggish and bounce around for a while and some of them just hit the AOV, break the trendline and start flying without even looking back. Therefore, I decided to enter all the trendline breakouts and rather wait a few weeks until it finally pops higher after going sideways and testing the support few more times, than missing some great momentum runners.
As I said in the previous post, I make all my decisions when markets are closed. End of day prices only. It preserves my mental capital in a HUGE way. Sometimes I can’t do anything but miss a move. But that’s ok because this approach has much more advantages such as defending my financial and mental capital from fake moves which happen all the time. And I can honestly say that even when trading only this way, I have new trades on a very regular basis. Plus, when price runs too fast too far, often times it corrects in price or in time and gives me another chance to get in at the break of the flag. So no biggie at all. It’s all about the attitude. You can’t catch them all anyway.
Trading the Flip patterns cannot do without drawing trendlines. Most of the time, it’s possible to draw a trendline connecting the highs of bars during a corrective pullback. However, trendlines are somewhat subjective. It took time and a ton of practice until I finally came up with the way how to draw these trendlines. The most important thing that comes to my mind right now is to know that they are changing all the time based on the fresh price structure. The steeper the trendline, the more probable a retest of it after break. For more aggressive entries, I use steeper shorter term trendlines. For more conservative entries, longer term and more shallow trendlines are better and more reliable. I prefer break of the trendline as an entry signal rather than break of the EMA20 because trendlines are most of the time closer to the support, providing better RRR. I would have to use shorter term MA like for example with period of 9 but that would add noise and clutter to my charts. So far, I’m fine with using trendlines.
This is tricky. Always. I have some rigid rules for setting my stoplosses but it’s too soon for me to say what is the best place to set a stop order when trading all the different variations of a Flip. This is probably the most evolving part of my trading plan, I’m currently trying all kinds of different approaches and figuring out which are the most suitable. So far I came to a conclusion that setting a stoploss largely depends on the current overall market conditions. If market goes sideways it’s better to put my stop farer than when it’s trending up because I can expect more touches of the support area. Stoploss is largely based on timeframe. Generally, the longer you expect to hold, the wider you should set your stoploss. I still keep finding my ideal holding period. I don’t mind holding for 3, 4 or even 8 weeks. I’m completely ok with that since I have life outside the market and I don’t dwell on taking profits as soon as possible. I let my positions work out.
To be a little bit more clear, I’ll tell you some of my observations. I start with a strict rule to have my stop always 2x-3x ATR, no less, no more (the only exception being initial flag entry). If it needs to be more, I wait for a cheaper entry. When price bounces too quick too far away from the AOV and breaks the trendline, it’s better to keep waiting. I’d have to set my stoploss too far away from my entry. I rather wait for the initial consolidation, enter on its break and put my stop below the consolidation somewhere below the trendline inside the triangle pattern (=initial flag entry).
When I enter on the very first bounce off the AOV, I must set the stop below the low of the pullback because there is a high probability of price testing the level once more. I always leave some space below the low because what happens is that price comes back to test the level and creates a lower low. By just a little bit but setting the stop a tick below the low would mean getting stopped out. By only a few cents and that would hurt mentally.
Always treat stoploss as part of the mental game. Do you want to achieve higher RRR with narrower stop? Then prepare yourself for more losses and multiple re-entries. You don’t feel like taking too many losses and you rather enter only once and set your stop wider? Then prepare yourself for smaller winners, smaller number of losses and longer period of holding. Something for something as always in trading.
As for trailing stoploss, I trail it quite aggressively. Lots of my losses are smaller than planned 1R because when holding for weeks, price has time to create higher lows and consolidations. I wait until the price structure lets me move my stoploss higher and only then I do it. I don’t hurry. Also, I always keep my stop below dEMA20 after price bounces off the AOV.
The same applies for PTs as for stops. It’s still too soon for me to know what is the best way to take profits from my Flip trades. Right now, I don’t trade to make piles of money. That will come in the future, hopefully. Now I’m learning and developing the best strategy that suits me and my lifestyle. Targets are mental game as well. It’s all about what you expect from your trading. Plus, of course, you must be objective about the price action.
Currently, I exit with half of my position at RRR 1:1 and set my stop at breakeven basically to make the position risk-free (I’m aware that it’s impossible in financial markets speculation, but you know what I mean). It’s also because I want to take some profit as soon as I can in order to feel good and have some consistent little wins. Again, mental capital first! Then I have two ¼ left. With one ¼ I exit on RRR 2:1 which makes the trade 1:1 if the last ¼ hit my stop at breakeven. If not and price keeps continuing, then I let the last quarter run as long as I can. Better said, until the uncomfortable fear of giving away too much of profits exceeds bearable level. I haven’t developed any rule for the runner yet. I have 2 runners open currently so I’m learning in the process. But now I feel like moving the stop behind higher lows or previous week’s low is the best way to do it. I’ll keep you posted.
Probably too many open positions? Am I not overtrading? Right now, I’ve got around 30 positions, risking only 0,2% per position. The risk is now ok but what when I start risking for example 0,5% per trade idea? That would mean 15% risk at a time with 30 open positions. I feel like there is SO MANY opportunities to trade. I need to filter more. Or do I? Is it necessary to take only a few trades? Is it possible to make it as a trader having so many positions on? What about high beta environment like it is for example now and all my positions getting crushed when market pulls back? Should I open some shorts? Go long volatility to hedge the possible correction? Or just trail my stoplosses more aggressively?
Market conditions – When not to trade? It seems to me that pullbacks work when markets both rise and go sideways. When broader indexes correct their prior uptrends, then Flips probably won’t work but more trade ideas will stack up on my watchlist because many stocks will pull back with the market. I need to go through some period of short term bear market or in other word a deeper correction. I need to see what happens to my setups. I don’t know yet and it’s a bit scary. I can backtest it, of course, but realtime is realtime. So far what seems to me the best is adjusting money and trade management based on the current market conditions. If market is choppy, set wider SL, if market is breaking out, let myself enter more aggressively, if market seems overbought, don’t predict but be cautios and move my stops on a regular basis to prepare myself for the possibility of a correction.
Stoploss – Isn’t 2-3x ATR too much? Do I really have to set my stop as wide as I do? Narrower stop would mean quicker profit and larger RRR, but bigger overnight risk because of larger position and smaller win rate.
Profit targets and scaling out the „best way“ – Should I really take half of at RRR 1:1? Don’t I just unnecessarily decrease the potential of a deep pullback setup? Shouldn’t I take half of the position at prior swing high no matter what RRR? How to move my stop in order to let the last quarter of the position run as long as possible?
These are the questions I’m asking myself now. And only practice, journaling and then reviewing my trades and my statistics will help me to find the answers. I’m happy that I completely felt in love with the process instead of only waiting for the success. I am sure money will start flowing my way if I keep thinking of my trading critically and really trying my best like I’ve been so far.
Keep following my blog as I’ll start posting my entries.
