What Can You Learn From A Scratched Trade? A Lot

Given the continued thin trade and based on recent feedback from readers and my
mentor students
(with whom I share log excerpts for instructional purposes), I thought it would
be helpful to spend some time discussing my morning ES trade sequence. Not
because it was a winner — it was essentially a scratch (and I often find the
scratches and losses to be more instructive than winners) — but because of the
interesting shift from a high-probability long setup to premise for a reversal.

The sequence, which appears graphically below, began with an initial long
premise once we broke north of the double 3 & 13 minute supports. Many readers
and students probably know that such a premise reflects a bullish cup with a
15MA handle premise base reflecting two timeframes, and thus it’s one of my
favorite entries given the psychological trader backdrop. It’s an entry that
I’ll take almost 100% of the time, even if the larger timeframe — in this case
the hourly — is in a contra-trend as long as there’s some profit potential even
if the larger timeframe trend support holds..

Anyway, as noted below, I scaled into the trade on a pullback to the supports
with a stop set south of the double 15MAs. I actually began the scale a bit
earlier than I would normally do, given what I viewed as high trade probability
and the related desire to be positioned at least minimally should the pullback
be shallow.  As the market pulled back to the supports, I completed my
positioning with a stop set at 873.50.

As the trade played out, and despite the probability of the trade, the supports
broke and the stop hit.  Regardless of my view of trade probability (I also
thought there was a 99.9% chance that Dolphins had the game won yesterday with
an 11 point lead and 5 minutes to go), the stop hit.  Surprised?  A bit. 
Disappointed?  Somewhat (yes, we’re all human).  Yet the market was sending a
clear signal that it broke key support and that I should be considering a
potential reversal, which I entered with a stop placed upon a reversal to the
north.  And while the subsequent short worked out nicely and pares made into the
retail panic flow, I’d like to keep focus on the example of required flexibility
despite my initial views as to trade probability.

A few last points: It was again somewhat of a scratch sequence, and some days, I
may not have taken the reversal as I may have just looked for a reentry —
especially true if I’m not particularly focused.  Additionally, the reversal
short could have stopped.  Yet it reinforced a necessary mindset that if we
don’t adapt or get stubborn in our beliefs we’ll lose in this game.  In
hindsight and even knowing the outcome, I’d take the initial trade every time
… and will hopefully again when such a premise reasserts itself.