by Griffin Cooper

The Emotional Side of Stops

Bee-da-doop. That’s my best attempt to use onomatopoeia to describe the sound on my broker when a trade is closed. All traders have experienced that sinking feeling when a stop is hit. We can unhappily relate to that moment, as the alert sounds become almost a Pavlovian response that creates a crease in the brows and a feeling of disappointment. Maybe a colorful word, depending on our emotional intensity that day.

Having to accept our stops being hit is a part of trading. It’s true. But let’s do our best to protect those stops so they don’t get hit as often. In this article, I’d like to explore this concept of protecting our stops with a support level that I think has a lot of benefits. Specifically for intraday, the low of yesterday’s session can be a great stop protector.

Why Yesterday’s Low Matters

One of the advantages of using a horizontal resistance level like the last
session’s low is that it’s objective. Trend lines are notoriously subjective, but there’s no
doubt about what was the lowest level a market reached during the previous session.
One could go even farther and say there’s no doubt that if that level is breached, it’s
going to get people’s attention, particularly if it happens early in the session.

For intraday, we of course want a support/resistance level that’s recent. A low of
day from two weeks ago will probably not be remembered unless it had some other
significance, but the previous session is still fresh in most traders’ minds.

The other positive aspect of the low of the day from the previous session is that
participants on higher timeframes look at that level as well. The opening price is
observed by most intraday traders, but the longer-term players will also be looking at
the lows and highs on a daily chart.

So, rather than floating in space, in the wise words of Chartist Zak Mir, “I like to
have some technical furniture to put my stop behind.”

The Morning Hook Setup: I Love the Smell of SSCs in the Morning

In the last few months, I’ve been doing a deep study of Dr. Ken Long’s Morning
Hook setup. Ken says it’s a setup of “elegant simplicity,” and in that spirit I’ll say it’s
essentially an intraday setup where an early session harsh selloff has a sharp, V-shaped reversal that creates a nice, low-risk idea. This setup is incorporated in the
Supported Spring Crossing (SSC) pattern that we teach in our Applied Systems
Development Course. Chart 1 shows a nice example in AMGN.

One common occurrence I’ve seen in the case studies I’ve analyzed is that many
of the best setups occur with a failed test of the last session’s low of the day. This level
fulfills all the previously mentioned characteristics: it’s objective, recent, and the higher
time frames see it too. So when we place our stop below the swing low of the reversal,
we get added stop protection.

Failed Tests and Their Logic

I typically like to start with empirical evidence, but a trading idea should make
sense as well. And the observed behavior here makes a lot of sense. Since a breakout
of yesterday’s low is likely to get some bears thinking to go short, when the breakout
fails, they end up bailing and triggering more buying to get out of the bear trap.
Meanwhile, bulls who have been looking to get a good price have gotten their wish.

Chart 2 shows a good example of the low of the day from the previous session
acting as support. The earlier example Chart 1 also shows a deeper but still failed test
of the support level as well (thin red horizontal line).

In fact, some professional traders have to wait. Dr. David Paul described the
often-berated act of ‘hunting for stops’ by institutional traders like this: “It’s always
looked upon as negative at the retail trader level. Institutional traders are taught from
their first day that they buy good levels or they don’t buy at all.”

Patience Pays

The markets seem to reward this kind of patience (and punish impulsive
activity). And while some might assume that intraday is not the place for patience, I
think it’s even more important to exercise prudence when the lure of impulsivity is the
greatest.

“Traders who become hooked on thrills take their eyes off the money and jump
into impulsive trades.”
–Dr. Alexander Elder, Come Into My Trading Room

Rather than acting impulsively, it’s more rewarding in many ways to channel that
energy into waiting for the right price to enter. This can produce its own kind of
satisfaction, to know that you got in at a good price. That while the herd was in the
throes of maximum panic, you were waiting on the other side.

Dr. Paul again: “I like to put my entries where the masses put their stops.”

Placing our stops and entries around yesterday’s low aligns with this disciplined
approach. It’s a way to participate in some well-timed patterns while adding some extra
protection to our trade.

If you’d like to learn more about the SSC Pattern and the Kata Challenge system, please visit ablewaytech.com.

Happy Trading!
Griffin Cooper