## How to Defeat the Dreaded “Ebb”II

BarroMetrics Views: How to Defeat the Dreaded “Ebb”II

Yesterday I laid out the context of the problem, defining “Ebb” and “Flow” and why the problem arises. Today, we’ll have a look at the solution. To understand that, I have one more distinction to make: the difference between a strategic initial stop and a tactical initial stop.

A strategic initial stop identifies where my definition of the timeframe’s trend is proven incorrect. In Figure 1, let’s say we are trading the 18-period swing on the 15-min chart. The strategic stop would be “B” – breach of “B” violates a prior 18-p swing high, invalidating the current 18-p downtrend.

A tactical initial stop identifies where the reason for the trade is invalidated.

In Figure 1 let’s say there was a ‘Death Zone” setup and trigger (there isn’t but let’s pretend there was). This means:

1. once we see acceptance below Value Area Low (in this case, 33% retracement), we should see a breach of A before we see a breach of the Value Area High (in this case, 67% retracement).
2. So, for the Death Zone, once we see acceptance below the 33%, the initial stop can be placed above the 67%.
3. Violation of 67% before that of “A” would not invalidate the sideways trend, but it would violate the reason for the trade: the Death Zone Setup and Trigger.

In addition, tactical stops can be qualitative. For example, in a Triangle continuation:

• after “E”, we should see an explosive move.
• Let’s say we are looking at a triangle downside continuation, if we see a move afterÂ  “E” that is down but on shrinking range, the likelihood is (a) “E” is incomplete or (b) we don’t have a triangle.

So, the reduction of range after ‘E’ would suggest we should exit the trade because ‘E’ is either incomplete or we don’t have a triangle.

Penultimately, strategic and tacticalÂ  stops can be at same price. For example in Figure 1, let’s say we took the trade after “B” because there was a contraction at “B”. The initial stop could be above “B” (once the swing line turns down) – that stop would be both strategic and tactical.

And finally, I lean to placing strategic rather than tactical stops.

Now we are ready for the insight: during my ‘Flow’ stages, the distinction is irrelevant. Because a ‘Flow’ trade moves to the first-third exit as a matter of course, at worst, my trades during ‘Flow’ are breakeven. But, in ‘Ebb’ stage, placing a strategic initial stop is a mistake. In ‘Ebb’ few trades move to the first-third exit price, and most trades take out the initial stop. This pattern is what causes the losses – the profits fail to cover the losses.

So what did I do differently in Feb? All my exits were tactical and of the 6, 4 were qualitative exits. True, all the exits could have been at better prices – with hindsight I could have improved the exits in 4 of the trades by 29 -46 pips. But, in 2 of the losses, I would have taken a 1% loss (2% total). That would have been enough to send Feb into the red. This insight provides the first clue – for me to turn ‘Ebb’ phase into ‘Normal’ phase, I need to use qualitative stops.

That is more difficult than it sounds, we’ll see why tomorrow.

FIGURE 1