Loss in “Emotional Capital” Can Lead to a Crisis in Confidence (Part 2)
12/02/2008 12:21 pm EST
Price began a nice rally over the next few hours. When it broke and closed above several prior swing highs, he added a gray up sloping Median Line and its upper and lower parallels. He noticed that price had briefly overshot the lower Median Line parallel, so he also added a sliding parallel to show where price would find likely find support should it trade back down through the lower Median Line parallel.
The question is always the same when a trader sees a change in behavior in the market: Is this a counter-trend move that will resolve itself at an area or support or resistance, leaving the trend intact; or is this a true change in trend? In the end, only the market knows.As an aside, the trader had now been watching this market since 6:30 in the morning and it was approaching noon. Though he didn’t realize it, he had already expended a great deal of emotional capital and focus without making a trade.
As the market made higher highs and higher lows, the trader began to really like this emerging rally. He marked the overshoot price made below the lower Median Line parallel and then, measuring it carefully, he projected it the same distance below the Median Line, a technique I teach in mentoring as well as in my seminars that gives a trader a high-probability target where price should run out of directional energy.
He liked the up sloping lines he had drawn, so he decided to enter a long trade at the re-test of the lower sliding parallel. He had a nice area to place a stop loss order, right under the prior double bottoms that also served as a swing low. There should be limit buy orders at the double bottoms, and these orders should act as a buffer to protect his stop loss sell order should price begin to trade below the sliding parallel.And he had a very nice price target to lock in his profits. He’d leave a limit sell order at the inside sliding parallel, which was below the Median Line the same distance that the lower sliding parallel was below the lower Median Line parallel.
More in Part 3 tomorrow…
I wish you all good trading!