Published December 26, 2023

A trade that meets all setup criteria can still reach its stop-loss before moving toward the profit target. The 84% rule is a method for handling that situation. It defines when a trader may re-enter the same trade and what criteria the second entry must meet.

What the 84% Rule States

The rule holds that if a trade within a trader's system fails the first time it is taken, a return to the same level should work about 84% of the time. The presenter describes this as a hypothetical probability, not a measured statistic.

The rule applies only when the second entry uses the same criteria as the first. These criteria include:

• The same entry trigger
• The same stop-loss placement
• The same profit target

The example used throughout is a break-and-retest strategy. In this setup:

• Price breaks a level of support or resistance.
• Price retests that level.
• A strong confirmation candle, such as a hammer, forms at the retest.

Why the Rule Can Work

The presenter identifies three reasons a stopped-out trade can later move in the intended direction.

1. Poor execution on the first entry. The first entry was either too early or the stop-loss was too tight. In the first example, the stop-loss was too tight, so the trade exited before the move developed. On the second entry, the stop-loss sits at the same level, but the market has already swept the liquidity below it.
2. A correct thesis. The trader may have identified the correct direction based on the system. Execution alone can cause the stop-out. A trader with a valid thesis can re-enter after a stop-out.
3. Fake-out liquidity. Price can move against a trader briefly, then move in the intended direction. The presenter notes that this occurs often for retail traders.

The presenter also states that retail traders often place stop-losses where they do not reflect proper market structure breaks. The market can then use these stops as liquidity before moving to the next level.

How to Apply the Rule

The method has three steps.

1. Enter on a valid thesis. Trade only one setup until the trader is consistently profitable. Enter only when the setup meets all criteria.
2. Do not re-enter immediately after a stop-out. Control emotions first. Confirm the trade was a valid A+ setup. Review why the trade failed.
3. Re-enter with identical criteria. Wait for price to return to the original level and retest it. Enter only when the same conditions appear.

For the break-and-retest setup, the criteria are:

• A break of the level
• A retest with a strong hammer candle
• A profit target at the high of day or a key level
• A stop-loss below the break of market structure

Example 1: NQ

On NQ, a clear uptrend formed with a new high. The trader looked for a break of the prior high followed by a retest with a strong hammer candle.

First entry

• The trader entered on the retest, targeting a level near 16,550.
• The stop-loss sat slightly below the previous pivot low.
• The risk-to-reward ratio was 2.06.
• The trade reached the stop-loss. The loss was $1,900.

Re-evaluation

• Price broke back below the level and did not hold it.
• The trader waited for price to return to the 16,510 level and retest it with strong candles.

Second entry

• Price broke the level, returned, held it, and retested it with strong candles above the level.
• The trader entered with the same profit target and stop-loss.
• Because of the candle's close, the risk-to-reward ratio was 2.45.
• The trade reached the profit target. The gain was $4,100.

Result

• Net result on the day: $2,200 ($4,100 gain minus the $1,900 loss on the first trade).

Example 2: SPY

On SPY, price broke above a prior resistance level and retested it with a strong bullish candle. The profit target was the 464 psychological level.

First entry

• The trader went long on the retest, targeting the 464 level.
• The stop-loss sat slightly below the prior consolidation, before price broke to new highs of day.
• The risk-to-reward ratio was 6.94.
• Price made a new high, but a candle closed below the stop-loss. The loss was $210.

Re-evaluation

• The trader did not re-enter at the first break above the prior level. The trader waited for a proper retest.

Second entry

• Price broke back above the 464 level and retested the 46,275 level with a hammer candle.
• The trader entered with the same profit target and stop-loss.
• Because this candle closed slightly below the prior candle, the risk-to-reward ratio was 8.0.
• The trade reached the 464 profit target. The gain was $1,220.

Result

• Net result on the day: $1,010 ($1,220 gain minus the $210 loss on the first trade).

Limitations of the Rule

The presenter states that the 84% rule does not guarantee a profitable result on every re-entry. The rule applies only when the criteria of the first and second trades match exactly. The examples were presented in hindsight.