*Full disclosure: in this particular example I am showing you, I DID NOT re-enter this trade because the re-entry with the new stop did not fit into my risk:reward requirement as per my trading plan so I could not take the trade. I would suggest the same that you check if the "new" re-entered trade's parameters suit your trading plan and risk profile before taking it.
However, there are circumstances that allow for this technique to be used and used quite effectively. Here's an example of one such circumstance. Just earlier today, I had an LONG trade on USDCAD where my stop was placed at 1.32700. I entered at 1.32900. My stops were placed only 20 pips away as that would be a level that again re-broke the TL to the downside. And if it did that, then the move would be losing its' mojo. But what ended up happening was that prices declined back down through the expanding triangle's upper TL, took out my stop and resumed trending up. In other words, it "bounced" off the TL. But not before it took me out. Sound familiar?
Well, using my "Zombie Trade" technique would get you back into the trade "safely". Safely in terms that your loss on the re-entry is tightly controlled. So here's the technique:
For reference, this is my earlier post on this pair where I predicted the current move up after a break and retest of the expanding triangle pattern:
In the MAIN chart above, you can see where I got stopped out on my buy when prices dropped back down through the upper TL of the expanding triangle. Yes, admittedly, my stop was too tight. But even when I got stopped out, I knew that the odds were that this trade was correct and should still go up. So I started to look for a "Zombie Trade" re-entry. On the next bar, I looked to see if it would break the low of the bar which took out my trade. It did not. So I re-entered on a close of that bar and set the low of the previous bar that took out my stop as my new stop loss. Now if that new stop gets taken out, then I would be out completely. This technique is a ONE-SHOT use. So then the market continued up from there and I would be back in on a "Zombie Trade".
Rules for Zombie Trade technique:
1. after your original stop gets taken out, must wait for that bar to close
2. watch the next bar. If the next bar has a low lower than the previous bar that took out your stop, then cannot use this technique. No re-entry possible.
3. If this next bar does not go below the low of the previous bar, then wait for it to close and re-enter at it's closing price.
4. Set your new stop at the low of the previous bar (the one that took out your stop).
5. You have now re-entered the trade with a new stop.
6. If your new stop gets taken out, then you are out of the trade as the price action may be signalling a reversal.
Why it works:
When your stop gets taken out and prices do not continue to decline (in the example I've shown. Reverse it for a sell setup), then it can be the result of stop hunting. When the next bar does not decline further than the low of the bar that took out your stop but instead continues up, then it is likely that the stop hunting is done. If it does continue lower, then it could be signalling a reversal so you don't want to re-enter. This technique will keep you from further losses in that case. This also sets you up in a re-entry trade with a tightly controlled new stop. Hope this helps!
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Please keep in mind that I am not giving any trading signals or trade calls here. Only providing my own trade thoughts for your benefit and insight as to my trading technique and style. Please don't ask if you should or should not take the trade or ask for stop loss and take profit levels. Any SL or TP given on my trades are my own I have used for my trade and are not recommendations for you to use. If you are not sure, then you do not have a trading plan for yourself in place. I suggest you make one before you continue to do any trading!
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