Welcome back to an always evolving 2021. With many opportunities at present, sometimes it can be overwhelming to know where to start and what to trade. If you reflect on your Safety in the Market trading journey to date, David’s introduced us to the ABC trade method, which was a beginner’s trading method. It formed what we know as one of our trading signals as we become more advanced traders, and hence why it was taught in the first book of the Safety in the Market educational series, the Smarter Starter Pack.

Fast forwarding a step further, skipping past the Smarter Starter Pack and diving into the Number One Trading Plan, one of my favourite trading quotes was from Bruce Kovner, from the book ‘Market Wizards’, who said:

“One of the jobs of a good trader is to imagine alternative scenarios. I try to form many different mental pictures of what the world should be like and wait for one of them to be confirmed. You keep trying them on one at a time. Inevitably, most of these pictures will turn out to be wrong — that is, only a few elements of the picture may prove correct. But then, all of a sudden, you will find that in one picture, nine out of ten elements click. That scenario then becomes your image of the world reality.”

I have previously written about the importance of having a ‘mechanical trading’ system. The reason why I bring it up again is, it is so easy to get lost amongst all the opportunities, that you forget the basis of your own trading plan. It is an important concept to remember as there are going to be many trading opportunities that fit the trading elements but will still leave you thinking questions such as ‘Is this going to be profitable?’ or ‘should I be taking this trade?’

We like to think we have iron-clad emotions and discipline, and at times we do, but other times we can come unstuck. That is why having a few potential scenarios in your head can also help you to weigh up the different scenarios of a potential trading opportunity or set up.

When it comes to Double Tops and Double Bottoms, David taught us that you can short the Double Top and for whatever reason, if it breaks through the high, you will be able to ‘stop and reverse’. This is already thinking a step ahead. Automatically this becomes an embeddable rule within your trading system. You can make it a part of your trading routine, where you may scroll through markets upon markets to find this setup, as it always tends to offer a tradable opportunity – regardless of which direction the market decides to go.

If we turn to Bitcoin, which is currently the talk of the town (ProfitSource Code: FXBCUS), the market produced a profitable Double Top, followed by a profitable ‘break into new highs’ trade. The reason this set up was chosen was because often when there is a very strong run people naturally feel the market is too high.

The top came in on the 25th of November 2020 at $19,510. As it had taken out the previous All-Time High (ATH) at $19,458 and provided a signal reversal bar, you might have been looking for a Double Top short position. Entry at the low of the 25th November with stop behind the high of the Double Top, around $19,610. The built in second scenario could be a breakthrough so planning for this with a stop and reverse as previously spoken about would be smart.

As you can see from the Reward to Risk tool in ProfitSource, a 2:1 reward to risk could have been achieved. Assuming you were trading currency style, at a 2:1 reward to risk, stops are moved to entry plus commission, so in this case the short trade would have been breakeven. Students who have been through the Active Trader Program Online Training may have been able to increase that Reward to Risk Ratio by entering the trade earlier.

On the 30th of November 2020, the market took out the previous All-Time Highs and the stop and reverse order would have been filled. One of the questions with the ‘stop and reverse’ strategy is where do you have your stop loss? You may have reconsidered taking the trade due to how far away the swing low was away, or if the trade was taken you would reduce your position size. As it went, the market pulled back considerable making a higher swing bottom before it took off again.

On the 16th of December 2020, the market broke out with a very strong close above the old top. It opened in the bottom 25% and closed in the top 25%. This was a very clear indication that there was strength of the breakout into new All-Time Highs.

Ever since, the market has continued to show a strongly trending market. At this stage it would be anticipatory to call for a top and the strong trend should be traded. The market will provide the subtle signs when the end of the trend is close.

In closing, the initial thinking is that this is easier said than done, and I do agree because as the market unfolds there are many elements that question the experience, knowledge and methodology, however, learning your tools and strategies in hindsight provides a lot more confidence for the foresight. Bruce Kovner’s said “you will find that in one picture, nine out of ten elements click” and this is where I like to see a high probability trade evolve from. This double top was temporary, and the market will likely continue to move away strongly.

It’s Your Perception  

Robert Steer