The monthly S&P500 Emini futures candlestick chart has not had a pullback in 14 months. This has...
Giving Yourself Time and Room to Be Right (Part 4)
04/30/2009 12:01 am EST
Price rallies a bit higher, but then the selloff begins again. Note that my stop loss order was never in danger. Now I can focus on managing the potential profits in this trade as price continues to make new lows.
Let me show you the same "Lazy Z" entry technique used on a trend line:
You can see that price has tested this trend line many times, and each time, the trend line held and a new rally was spawned. But if you look carefully, there were at least four occasions where selling new lows led to getting "washed and rinsed" out of a short position. If you had tried to sell new lows four times and gotten stopped out four times, would you have been able to sell the fifth break to new lows? Would you have been able to sell the sixth break to new lows?
Rather than blindly selling new lows, smarter traders have started waiting for a pullback to sell. They have learned the idea that "what was resistance has become support" and are trying to exploit it. But even this method has become susceptible to the "wash and rinse" pattern.
I suggest you don't sell new lows or buy new highs. There are too many false breakouts and most of us are not equipped-emotionally or financially-to be there for the fifth, sixth, or seventh breakout if we have sold and been stopped out of the four prior false breakouts.
I also suggest you consider revising your trading entry that includes selling when price pulls back to the resistance (which had been support). I suggest you consider looking at the "Lazy Z" pattern. Make certain there is a fresh steady stream of sellers by sitting on the sidelines until price makes a "wash and rinse" rally, then makes a fresh new low-and then enter your limit sell order with a stop loss order above swing high just made when the weak short positions were forced to cover.
You will have found confirmation that there are fresh sellers, and now you'll have a swing high to hide your stop loss order above, ensuring some protection from limit sell entry orders.
The markets change and evolve. If we don't do our homework and adapt accordingly, our trading profits will suffer and eventually disappear.
I wish you good trading.
"Master your tools, Master Yourself."R
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