“Man I am glad I got stopped out when I did…look where the market is trading now!” This is probably a true statement if the market really went in the opposite direction that you thought it would go. But what if you were a part of the market move after you were stopped out?!
Buying on support and/or selling against resistance are not new concepts. Chances are you have traded on both of these ideas. But what about the times when you were wrong? What happens to the price action after you were stopped out? Was there a trading opportunity missed?
A strategy that some traders look to employ is to make my stop loss order a 2 lot when trading a buy support or sell resistance type strategy. Let’s think about that idea and discuss what it means.
Any trades are educational examples only. They do not include commissions and fees.
Let’s say you want to buy a market where there is a level of support that you'd like to see the market bounce off of. BUT, under this level of support, there is a decent amount of possible downside price action if this support level does not hold. So, you will enter the buy order at this area of support and put the stop loss order underneath this level of support. BUT, you will make the stop order to sell a 2 lot!
(Traders call it the Break Flip 2 Stop Strategy. If we break support or resistance, you flip the position with a 2 lot Stop order)
One will exit the one long position and the 2nd will initiate a brand new position making you short a contract. Traders do this to participate in this possible penetration of a support level. Their thought process is that if the support level does not hold and they're wrong about the initial long position, you want to be short the market moving forward. So as the initial long position gets stopped out, you would realize your losses on the first trade and immediately initiate a short position based on the break of the support level, thus trying to potentially take advantage of a possible move lower at that point.
Here is an example:
Let’s say the trader buys the July Kansas City Wheat contract at 740’0
The stop price would be 730’0…but you would make it a 2 lot.
Thought process: If this 730’0 level does NOT hold, you may want to initiate a short position at the exact same time looking at a market that may begin to trade lower and into the yellow shaded box.
Have a look:
Any trades are educational examples only. They do not include commissions and fees.
The same strategy could be used when you are trying to sell resistance or selling a double top. If you are wrong and the market breaks to the upside, you would take the loss on the initial short position, but immediately put on a long position to potentially catch a move higher based on the resistance level not holding.
Here is another example:
Let's say the trader wants to sell the Canadian Dollar at 91.00
The trader puts the stop loss order at 91.60… but makes it a 2 lot.
Thought process: If this 91.60 level does NOT hold, you may want to initiate a long position at the exact same time looking at a market that may begin to trade higher (see yellow shaded box).
Have a look:
Any trades are educational examples only. They do not include commissions and fees.
By no means is this a foolproof option that works every time. And of course, there are certain levels and/or trade ideas where this strategy may not be a good fit at all. It is merely an idea that tries to recognize when you are wrong, exiting your current futures contract and flipping your position the other way to potentially trade a market that may have a decent break-out ahead of it.
Please note: A new stop loss order will need to be entered once your reversal play has been executed. Unless of course, you have the capability to place OSO (One Signals Other) contingency orders. In my opinion, a good rule of thumb for a level to consider is the entry-level from the previous trade.
If you understand the strategy and are comfortable with the execution, look to add it to your arsenal of trade idea strategies.
