When a high probability pattern shows up during the premarket session, the average trader has the impulse to take the position as soon as the market opens.
Very often the high odds pattern makes a strong reversal as the market is going into the first reversal time at 9:35 AM breaking the LOD/HOD, depending if it is a long or short trade.
One of the possible reasons for this reversal is that a lot of people already inside the trade, are closing the position, taking the money of the table practically at the same time.
This profits-taken action, makes the “high probability” pattern look like failing the original direction and as the time goes by, the pattern retakes the original high odds direction, creating a very frustrating sensation on the average trader.
The early entry must be considered as a very aggressive action, leaving the trader with few alternative strategies in order to take the trade.
One of the alternative strategies is called “retest’ and consists in waiting until the reversal move generated as a consequence of profits taken, tries to get the LOD (HOD) for a long(short) position.
Once this retest fails, the trade can be taken as the first buy (sell) set up happens.
If the retest overcame the HOD (LOD), the possible trade should be revaluated in order to decide if the new pattern and stop point are both acceptable.
Let’s analyze a retest example to understand better this very important and conservative strategy.
Monday October 13Th, 2008, NFG did a bull gap showing itself as a high odds technical pattern.
Let´s take a look at NFG daily chart:
Now let´s analyze the NFG 1 min chart.
NFG did a bull gap over the Friday 1 min base right into the next resistance area, so an early entry above the two 1 min bars is an aggressive entry without retesting the LOD even having those first BT bars.
The entry was made above 30.55 which was the maximum of the 9:32 1 min bar.
The stop was 29.97 with 1/3 of the regular lot due of the aggressive entry point.
The LOD was retested but with a 100% of retracement.
The second entry above the 9:38 AM was not possible because we have to see the retest and fail situation, which, obviously, we couldn´t see with a 100% retracement.
So we had to wait until a safer entry point was created at 10:12 AM with a buy set up over a minor support mS area at 31.04 value.
At this level, we add another 2/3 lot and trailing our stop for the whole 3/3 lot at 30.81 so, the total stop loss is now 0.23 c. against the 0.59 c. original stop loss, allowing to increase 3 times our size without risking more money, but once the trade is well going into the right direction.
This strategy implies to add shares to the original size and trail the stop not risking more money than the amount allowed per trading plan.
Therefore, another possibility, taking in consideration both sides of the classic “dilemma” of the average trader, neither being exposed to a complete Risk Unit losing trade nor letting pass a high odds trade, is to allocate a smaller amount of money for the first aggressive entry point.
You can even, if the trade goes into the expected direction, add shares to complete the risk unit as it is defined in your trading plan (add a second part with different stop or add and trail to the second point stop, etc.)
That way lets you not lose any high probability pattern without risking the complete regular risk unit “R” while performing an aggressive entry strategy.