The Art of Trading

The shorts were cooked in an afternoon reversal.

The low was made near a gap around 11:00 am, and the shorts were history when it was Dime Time and 25 support held. Fridays are not particularly easy, as big players re-adjust their weekly positions.

Four levels of resistance were tested and broken, until the final level held at the EOD, starting at 4pm as profit taking finally came in.

My rule is simple: One contract going in the right direction is better than 5 going in the wrong direction. Volatile moves have occurred lately, and I have found it easier to reverse than fight what seems to be a rising tide.

Averaging in is a loser’s game, and will cost us dearly if we don’t pay attention to which direction the market is moving Now as opposed to a few minutes ago.

Lunch time trading is for those who missed the primary trade; if you spotted the 42 resistance, there was nothing to do but take profits near the gap target and suspect the potential db may hold.

It did, and why fight it?

Go with the flow. Just like a tide, when it’s coming in go with it, and reverse the process when the tide goes out.

The secret code traders understood where the reversal point was, and made profits in both directions if they understood the dynamics of our Angels and Demons trade. Everyday there is a set-up, and the key is knowing what to look for.

Reversals are more easily seen with the luxury of a rear view mirror. Sensing the turn around is more art than science, and being in the wrong direction is acceptable.

Continuing to be in the wrong direction, however, is not.

Fry Day

The premarket dump turned out to be the perfect setup for the 123 lower low as the price rebounded. After a long lunch slim jim, the globex hi was taken out on the other side in the afternoon. Then the boys played the same game and caught the late buyers buying the pullback.

You can only anticipate moves like these by being in front of the computer for a number of years and seeing all the games that they play. Experience is one of the best teachers I know.

Marginal lows and high’s are a bit tricky, but the enlightened ones know how to play this game exceptionally well. Being aware of possible reversal zones and times is the key to catching these trades that change direction.

Kevin haggerty’s signal bar strategy is one of the best techniques out there day in and day out to capture these powerful ricochet moves.

Stop Losses

Stops are to be used for one purpose.

To stop your losses.

Get over your ego, so you can live to fight another day.

That’s all that needs to be said.

Thanks to Dennis Gartman for these great rules.

This was quite a day.

Smug traders with no respect for the market suffered their rightful punishment.

Anyone who tells you this market is easy is either lucky, a liar, or exceptionally talented.

I do not consider myself any of the above.

Here is a conversation I had with a fellow trader (FT):

FT: Yikes! What do I do now?

E: What’s the problem?

FT: I am underwater, a lot.

E: Oh. Once the horse is out of the barn, tough to close the door and catch him.

FT: Great. Just what I need, a lesson.

E: This is a lesson I suggested for you the other day. Did you read it?

FT: No, I have been busy.

E: Did you take the early morning long?

FT: No, I was chicken.

E: Well, did you take the resistance trade I called at the gap fill?

FT: No, I thought it was going long then.

E: Do you remember I called support near the day low?

F: Yes.

E: Remember I said be careful shorting too low?

F: Yes. I took the resistance where you said it should be.

E: And?

FT: It didn’t work.

E: Right. We never know who will win the tug of war. That’s what our stops are for when we guess wrong. Support held, then the retracement turned into a reversal. After all the profits we made, a stop out is the least of our concerns.

FT: AAAARRRGGGGHHHH! I can’t stand it.

E: Three thoughts, FT:

• Have a maximum stop that you will honor, no questions asked. No one trade should ever make you or break you. Just get out, even if you screwed up. It should be a money stop, a maximum pain point. It will probably be just before the market turns around in your direction as luck will have it. So be it.
• Learn from it, live to fight another day. Study the charts and find out where your judgment was wrong. Most times it is improperly evaluating risk vs reward, the fundamentals like first of month bias, or underestimating the PPT.
• Promise yourself (again) to always honor your stops.

FT: Thanks E. You’re always right.

E: Nope, Just right about stops though.

overview

Gap up, trap early shorts, consolidate, squeeze them. Consolidate, pull back as profit taking, keep pulling back squeezing the longs.

The numbers change, but the patterns are familiar. A news report like the CPI is an excuse to move the market, and hapless traders get stopped out several times on the short side. Finally giving in and chasing it looking for the trend day, they get their clocks cleaned in the other direction.

Double trouble.

Keeping track of gaps and knowing your potential targets helps to guess what they have in mind. No guarantee, of course, but an edge.

By carefully studying ballistic theory we can look for clues that suggests the likelihood of reversals or continuation at these important areas. Chart patterns like doji bars, evening stars, and tails are all confirmation that the current trend is about to end.

Experience is really the best teacher in spotting reality at these often confusing market support and resistance levels.