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I Spy a Large Trading Opportunity–How You Can Too (Part 10)
06/27/2008 12:00 am EST
Now let me show you one last thing about this trade. There’s another characteristic to a chimney formation that you have to keep in mind when trading them:
Once chimney formations have reached their targets, they tend to head in the opposite direction in the same ‘near vertical’ fashion, so the use of tight stop profits to box in profits is essential when trading these formations. If you get a good amount of profit in your position, you need to be protected at all times in case you were incorrect about the chimney’s final target.
Looking at the chart above, you can see the price recovered nearly 2/3’rds of its downward move as traders that had chased price lower and gotten short at poor entry areas were forced to peel off their short positions at a loss. As price traded back higher in the chimney formation, the stop loss buying began to feed upon itself, driving prices higher and higher until the market finally reached equilibrium.
Always use stops! And always use proper money management to box in profits as they unfold—if your capital is at risk, you need to be paid!
I wish you all good trading.
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