Every trader in our firm knows these three crucial price action rules. Do you? I'm Mike Bellafiore, and we're one of the top proprietary trading firms located in New York City since 2005, and now Miami as well, and proud to have developed number seven and even eight figure per year traders. Watch, take notes, and learn from a pro S&B trader so you can grow your trading account. Most traders are just a few small adjustments away from success, but they kind of often fall into an emotional cycle.
Doing something well, then making other mistakes that throw them off course. Trading success feels so close to these traders, but it always just feels out of reach. Today, I'm going to show you three price action rules that can cut those out, cut out those costly mistakes, and get you back on track.
But let's start by addressing three of the most common problems we see from developing traders. So first, we see traders get all wrapped up taking trades before they develop. They're losing on the multiple attempts prior to the trade setting up. Losing one, two, three times, and by the time the trade works, you've burnt so much mental or emotional capital, even physical capital, that it's nearly impossible to take advantage of the opportunity being offered.
I've been there. We all have. This second problem we so often face, and it's one that often relates to the first, and it's actually entering without a real plan.
So we enter on the idea of the trade. We have this great trading idea. and we enter because we see the entry, but we get so excited about the trade showing up for us that especially if it starts to work immediately, but then come back against us, it starts to become a problem really fast because then our idea's cracked, but our trade strategy isn't there. The third problem's so common and we have to, have to, have to address it.
We've all gotten in the trade. We've realized that we're just too small for the EV in the trade. So we almost panic.
We know we need to be bigger in it. So we try and add to the trade. We try and add to our winners, right? But unfortunately, at times, the adding can really just crush the expected value in the trade.
It can cause a bigger problem. These three problems we're going to solve today. The first one, not having a continuation trade as part of your trading playbook.
We're going to go through a touch and go trade. The second thing we're absolutely going to talk about solving. And the solution to the problem we talked about of jumping in without a plan is you start with your stop. You are only as good as your biggest losing trade.
For the lifetime of your career, you will only be as good as your biggest losing trade. The third thing we're going to talk about is how to add to trades appropriately, how we add to trades on the desk. The first rule is understanding continuation trades.
So most traders either focus on breakouts or they focus on fade trades over extensions, but there's a third opportunity that is so often overlooked. That is the continuation trade. The specific setup for this trade that we're going to talk about today is called a touch and go.
It's all about capitalizing on an already existing trend. And here's why it works. So as humans, we're wired to recognize patterns and continuation trades are based on simple repeatable patterns you actually already know.
We're looking at a real example here. It's a continuation trade. Do you see how we broke the lows of that consolidation, the prior lows?
Think about it. If you were making a breakdown trade here, it can be a good trade, but you have to be really aggressive to get really good pricing or really patient to wait for that break to really show up. If you are making what we call a touch and go trade, you're letting it pop back up, letting it try and get back to that prior level of prior support, now turned resistance.
This is happening on a 15 minute chart. So you can see how this is setting up a bunch of different intraday scalps or shorter timeframe trades. What we're allowing to happen in a touch and go trade, and a lot of us as traders will have the one minute chart or some people use a two minute chart on the top.
and then you'll have a 15 minute chart just below it. The reason is for exactly a situation like that touch and go, we might be basing our idea off of the 15 minute chart, letting that stop get put in on the 15 minute chart and then executing on the one or two minute chart. We get a clear range break to the downside and then we come right back up to that area of 15 minute support and then we start to sell off.
Most trades are... actually going against our human nature. They're going against that pattern recognition that all of us have.
Continuation trading is a way to play with that pattern recognition. All right. So you get that break, you get that retrace, you get the continuation, you get that break, that touch of the retace, and it's going to go right away.
The touch and go on the 15 minute is a really important thing to take advantage of. Most of the trades require very specific trading skills. Overextension trades require very specific trading skills. They require the ability to recognize a distinct change. Breakout trades require very specific, distinct skills.
They require timing, which is a really tough skill to develop. Continuation trading requires skills as well, but it requires different skills. But honestly, they're skills most of us inherently already have.
As humans, we're kind of biologically trained to recognize patterns. It's part of our survival mechanism. It's a skill we all have.
And the easiest patterns to recognize are actually consistent patterns. Our brains and our emotions aren't so great at establishing new patterns, but we're really good at going with existing patterns. This goes so far as Lance earlier this year challenging our interns to draw out the most sustainable move following a breakout. It wasn't the breakout itself, it was the sustainability of the move following a breakout. What we got was this pattern route, breakout, retrace, continue the breakout, retrace, continue the breakout.
So a pullback into resistance on a higher timeframe. In this case, we have that breakdown that occurred. and then that pull back up into resistance on that higher time frame.
We see the break, we see the change, that touch, and then we see the go. We can target the lows of that move and we can trail our stop down. Now this trade works great on 15-minute charts.
And the same pattern can get executed down to a scalp. We talk a ton about that scalp and we teach it very clearly in the scalping program, that second chance scalp. The touch and go is a great price action trading rule to allow you to take an easier trade, especially when this trade's occurring on a 15 minute chart as it gives us so many different opportunities to enter trades.
The second rule is one that can save your entire trading strategy and sometimes it can save your entire trading psychology too. You have to start with your stop. If you are trading price action, you need to have your stop level defined before you even consider entering a trade.
This is where so many traders go wrong. If you don't see and set your stop first, you risk getting caught in a market randomness. So let's break it down with an example and then we'll calculate the risk and reward from there. So as we're looking at our example, where would your stop be?
We had that break, we had the touch, and now we're seeing the go. Your stop is above the high of the candle. It's at that touch.
Your target we already talked about is the low. So if you're entering as that trade turns or right after that trade turns, you know exactly where your stop is. So you have to start with your stop.
If you don't start with your stop, it's impossible to calculate your EV, that expected value that we look for in all of our trades. You don't really understand where you're risking against. When you're trading price action, it's so, so, so, so important to allow and look back at the price action to determine where your stop was prior to taking your entry.
Once you have that, you actually have your EV. You can start to calculate your EV, your expected value, because finally you have a risk to reward ratio. If you need help calculating your EV, we just did a great video on it.
You can go ahead and even use our EV calculator. to come up with some really good examples and help you learn as a trader. But for the purposes of this, every trade you take, please, please, please, start with your stop.
Let the stop get put in place, identify where that is, and then based on your entry, you understand how much you're risking. It's gonna slow down your thinking. It's gonna give you a better opportunity to recognize what the EV is in the trade, and that's gonna help you with your trading decisions.
Rule number three is all about adding to winning trades, but doing it the right way, not just adding because you're up in the trade or because you weren't big enough. We did a study and we found that only about 20% of trades offer a real opportunity to add. And most traders kind of forget that or they miss that and they wind up adding at the wrong time. They wind up adding during a reversal rather than just a reversion.
So here's an example of how we identified a chance to add. And we maximized our trades potential. What we have is this is the exact same trade. We just took it from a 15 minute to a one minute.
And we had that breakdown. And then we're seeing what we call a puppy dog consolidation below the lows in this little consolidation right at the lows of the range. This is a different trade.
So we are giving ourselves the opportunity. to add. We were in the trade already, it worked, and now we have an opportunity to add. The high of that wick of that candle can be our defined stop, and our entry can be the break of the low.
We have our stop, we have our entry, we have our reason to add because it's a totally new trade. Do not take an add unless it's a new trade entirely. This gave us a chance to add. If we didn't take it, we underperformed on the trade. If we added just because we're undersized, we probably underperformed on the trade.
If we added in a reversion trade without the reversal trade falling back into our laps, we forced it and we underperformed. But again, not all trades do this. Not all trades go from one trade to setting up into another trade. Conservatively, just assume about 20% of your trades will give you a chance to add. 20% of your trades will fail immediately.
And 60% of your trades will work out okay, but that 20% will work out exactly as planned or better and then give you a chance to add to your trade. For this trade, we're going to trail our step down as the price action continues lower. And right here, you notice we get another puppy dog consolidation.
So we get another chance to add. Well, that's very interesting because we had that first one and now we have a second one, another chance to add to our trade. You can rinse and repeat.
When things are working, stay with them, stay with them. You couldn't add just because you were like, oh, I wasn't big enough on that breakdown, I need to add. You needed to let it set up for you. You need to let it put in a stop and then you had an opportunity to add to that trade. Once we get the momentum, you can use a simple two bar trail to exit, trail your stop down to the highs of the prior two candles.
Right here, we would be stopped out and that's the end of our trade. But we were able to add two times just by being there in the trade. So today we focused on three key price action rules.
Having a continuation trade, always starting with your stop, and adding to your winners at the right time. Now these are really small adjustments, but they can make a huge difference in your trading success. For most of us as traders, we can study all the things holding us back.
It might feel like a giant laundry list of things holding us back. But then if we actually categorized them, it's really just two or three things that are holding us back. By implementing these three things we just talked about today, we're actually likely to eliminate the two or three costly things that are most holding us back. Now, if you want to dive deeper and learn more strategies that can improve your edge, in addition to this puppy dog consolidation and the touch and go, you can join my free webinar.
You'll get a cheat sheet with powerful trades we use on the desk every day. Click the link below to register. Or if you want to dive deeper into the EV, we had put out that free EV tool video.
Go ahead and check it out. The link is in the description below.