I’ve been looking for an opportunity to try out a new exit strategy for my Flash Formation Fractal play and I got it this morning. But first some background information that made me want to change anything in the first place.

As those of you who follow my blog know, I am a big fan of FFFs and counter-trend fades in general under the right conditions. They can offer low risk, high reward entries if you have the guts to pull the trigger. In the past, I have used a standard 1.50 ER2 point stop for such entries and I would hold onto the position until either my stop or target was hit. After evaluating enough of these trades, I started to see a pattern emerging that seemed exploitable.

When FFFs fail, sometimes price would just blow right through the FFF reversal zone like it wasn’t even there. But because FFFs by definition occur only at the end of a prior move, these bursts often would not go too much farther before some sort of reversal is mounted. Under my old exit strategy, 1 of 2 things would usually then happen.

1.) Price would blow right on up and take out my stop prior to a correction
2.) Price would stall and pull back but never make it to my target…when this happened my stop would usually get hit eventually

However, rarely would my target get hit before my stop under these circumstances. This isn’t to say that there weren’t times when the position would show a profit, its just that my binary exit strategy was not robust enough to capture limit my losses and maximize my gains under this scenario.

FFFs are supposed to be areas where a price reversal is imminent, period. Thus if price blows through the FFF zone, it is a red flag that such a reversal is no longer likely and a sign to be looking for the nearest exit.

So my new strategy is this:

Set the initial stop at a reasonable distance beyond the FFF Reversal Zone (‘A’ on the chart above). If price blows through this zone, then wait for the move to stall and look to take a small loss/profit around the entry price as the whole premise of the play is blown.

However, if the FFF holds true and price does reverse, adjust the stop to a more reasonable level (‘B’ on the chart above) but still ensure that it is outside of the FFF Reversal Zone.

Finally, as price makes it halfway to the target, move the stop to just above the FFF Zone (‘C’ on the chart above)

Which brings me to today’s play. It was my only trade today and it yielded a return of 1.53 R-Units. The NYSE-TICK had spent the entire morning under water up to that point. Price was mapping out a controlled upwards corrective move off of the morning drop attempting to go for a gap fill.

What caught my eye on this move though was the lack of increasing volume on the 2-minute chart. While volume spikes were occurring as price increased, each spike was lower than its predecessor. This was all the confirming evidence that I needed to attempt an FFF Fade.

I ran the calculations and the FFF Reversal Line was in the 782.10 area so I set up a Limit Short Sell at 781.90 with an initial stop at ‘A’ . My target on this play was looking for a pullback to the rising channel trendline around 779.00. Not wanting to get greedy, I put a Stop Buy Order at 779.60 and within 15 minutes I was hat hit my Net Daily Goal for the day.

Overall, I had a very productive day.