Ability to get out a trade with zero or minimal loss is a key characteristic of JacobsLadders Major levels. I call this an ‘escape hatch’. If you use the reference trade set ups to trade with my levels, wins plus escape hatch constitute 85% of all trade set ups.
The question is how to determine whether a trader should look for escape hatch or stay in an allow the trade the full room till the stop level the trader have in mind.
As author of these levels, The levels by itself does not define a hard stop. That is because stop price is a trader’s choice. It is based on a trader’s trading system. Some people trade for higher number of handles and may use wider stops. Some may be looking for 2 to 4 handles and may want to use tighter stops.
However, I provide a a reference model to trade on my levels , this is my personal rule system. It defines as one tick below next level include Low1/High1.
However if a trader wants to use minimum loss as possible and would like to get out of trade at the earliest if trade tends to move against entry, trader can trigger escape hatch process. Here overshoot level is a key trigger point for triggering escape hatch.
Triggering Escape Hatch
Here are things a trader can use for triggering escape hatch.
- Price dips below overshoot level
- Price stays against entry for 10 minutes and can not recover in favor of trade
- The main leading instrument of the day ( NQ or RTY) is already moving against the direction of the trade you are in and so far your trading instrument has followed the leader.
Rules for using Overshoot levels
- If price does not go one tic beyond overshoot level, trade is still considered in play
- If price drops one tic beyond overshoot level, the escape hatch is considered triggered. Trader moves profit taking order down to break even price or one to 4 ticks below, depending on range of price and trader’s risk appetite.
- If price does not bounce at all, the hard stop is triggered one level below
Example. Trader goes Long ES at 2920 Level Low with 2920.75 as entry price. Overshoot level is 2917, Level Low 1 is 2915. If price drops below 2917, trader moves order to exit at 2920 or 2919.5 . Trade has hard stop at 2914.75
The chart above is a real example from April 25 2019 on NQ. The chart shows an extremely tight overnight range. Major levels are only ~ $250 per contract apart. This by itself is reason for caution. Leaving that aside, see how escape hatch process could have cause very minimum loss to the trader
A 300 tics chart is used to reveal price action in through details. If you look at this on a five min chart and price moved very fast , you may not see price has actually bounced to give an escape hatch.
What this shows is that , an Level Low long could have been scratched for a 1.25 handle loss
Even if overshoot level and escape hatch is not used due to fast moving price, the Level Low1 stop would be limiting the loss at 6.5 handles. There by giving trader long opportunity from Low2 area. This is another beneficial use of the reference model . The level marks clear risk areas. The reference model gives a real world risk manager, highly rewarding trading system.
The above example shows the system works even on tight ranges. When ranges are wider, this works for greater advantage to the trader.
Disadvantages of Escape hatch with Overshoot level
Use of overshoot level is an advanced day trading model. If you are not very experienced in day trading, this could be a case of ‘too much information’. Too many lines in the charts may cause confusion or overwhelming information. In this case, it could be better to simply trade with a hard stop and use a time based trigger to decide to scratch the trade. Make sure the stop is within the risk level your account can handle by trading the right number of contracts that matches your capital.
Secondly many trades may dip to overshoot level and then reverse in favor of the trade. By triggering escape hatch, you may miss a great wining trade. It all comes to trader’s risk tolerance and trading system.