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Posts Tagged ‘risk and reward’

Chevy Chase at his finest.

Round and round we go. Market bottom is in. Housing crisis solved. Etc, etc.

What can Mr Bernancke and the government cook up now?

We’ll just have to wait and see. The market loves to squeeze the shorts. When “they” run out of gas, re -enter until it stops working.

Meanwhile, looks like taxpayers are now officially on the hook for all the indiscretions of the past few years.

Just take advantage of the volatility and take your signals.

If the odds favor  regression to the mean, play it.

 

Gap and Trap

Gap and Trap

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“Amity Island had everything. Clear skies. Gentle surf. Warm water. People flocked there every summer. It was the perfect feeding ground…”

At 11:30 I suggested to colleagues to take their short profits off before noon today. It could have gone to any day low, but I felt the weekly shorts should capture their profits early after such a great week.

It turned out to be a lucky call.

Guessing against the trend is never easy, but odds and probability shift and you have to adjust your plans accordingly. (Remember the Commander’s Intent theory?) 

There are many techinques that technical traders use to project possible targets, but it is not an exact science; it is more about being prepared for areas  or “zones” of support and resistance, and then not being stubborn when the momentum clearly shifts from one side to the other.

When there is blood in the street, be on the lookout for jaws.

 

jaws loves to catch those late to the party

jaws loves to catch those late to the party

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 Sloppy and choppy trading for the vast majority of traders unaccustomed to sequence trading.

 Plenty of setups today in both directions if you know what you are looking for.

Grabbing the majority of the move and leaving the last tic or two for the greedy usually works best for me.

That’s the essence of risk and reward; where do the odds of a small or large reversal begin to dictate your choice in direction?

Trend trading is my preferred method of playing; but in range days (or reversal days!) it seems wiser to play the range trading game until it doesn’t work anymore.

Having multiple contracts on increases our risk, but allows us to scale out our first points and then trail for the larger move. Scaling into a position is also viable provided we aren’t deluding our self about the true stop and breakout areas. These are gray areas that each trader has to address in our own business plan.

If I sense a big move is coming, I will assume a little more risk; not by adding more contracts but by scaling in early and then a bit late if it takes a little more time to develop the play.

I also am willing to assume more risk when the count is in my favor. Bases loaded, no outs, and a 3-0 count I assume the pitcher is coming with a fast ball right down the middle. When I get my favorite pattern setup, at the right time, and with the right volume signal, I am all over it.

Many ways to play the risk reward game; as long as I am willing to pay the price when I am wrong.

Staying in the game long enough to get another at bat is what it’s all about.

 

slice and dice

slice and dice

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Zones of support occur at many different levels, depending on the time frame that you are trading.

One of the best trading analogies I ever read about was in Trading for a Living. Dr Elder likened these areas to “snowfences”. For those of you who live in a warm climate, devoid of snow, a snowfence has flexibility. It bends a little and “gives” on contact sometimes, but it doesn’t collapse. Great traders incorporate this concept into their system and develop strategies to compensate for this wiggle or breathing room.

When the price is near these important areas, I try to interpret a few key variables that will tip the scales in a certain direction.

Risk versus Reward is one of these important considerations. If I am willing to risk 1.5 points on a trade, what is the potential profit? If the trade is scary, but the market dynamics are at a major pivot, I remind myself that often the trade I least want to take will most likely have the best risk/reward potential.

Risk 1 to make 1 or risk 1 to make 7 or so points.

Support today I thought would be the 08 to 1410 area. The end of day trade was a classic example. 09 tested its double bottom, but held and bounced to the 1418, squeezing the late shorts who had hoped for the late day breakdown.

From a r/rperspective, yesterday’s 41 high said a few traders would like to take some of their 30+ points as profits.

 Good ole’ R and R, one of a trader’s best friends.

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The banana peel trade occurs more often in schizophrenic markets.

I guess we could say that means all the time.

There is a definite timing pattern I have noticed lately.

The technique currently being used is the alternating squeeze on both sides.

At least the market is fair; it messes with everyone  as it regresses to the mean.

The early shorts were squeezed to a breakout on the weekly chart; lunch was for consolidation; headfake the intraday breakout; reversal and marginally test the globex low, bounce to a positive close.

Not easy, I admit.

But if you cannot see this rhythm after market hours, you certainy will not see it in real time.

Reversals occur in zones of confluence, at pre-determined levels. Today’s reversal action was more difficult for most to suspect because it seemed like a runaway freight train.

Traders who study multiple time frames noticed visual resistance on the higher time charts.

Students who are aware of trade by trade risk/reward ratios were on high alert.

And traders who know the secret code clearly had one foot on a banana peel, recognizing the high probability of a substantial pullback.

Knowing the market will retest prior levels of support after reversing should be expected. The unknown is at what level support will come in. 

Keep your eyes peeled for the target or trailer exit to preserve your profits.

 

 

 

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