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Posts Tagged ‘support and resistance’

 

Well, what an interesting day. Overnight globex ramp up, then gap up at the open taking out last week’ s high.

Clear sailing, right?

Wrong. Another misdirection trade catching traders buying the pullbacks all day long. Momentum didn’t begin in earnest until the lunch breakdown.

Overight actiivity is always suspect since volume is low and price can be easily manipulated.

In a book I am reading, a theory of war was being discussed. CI (Commander’s Intent) theory was suggested, as “No plan survives contact with the enemy”. I instinctively knew what the author meant. Planning is important, but then we must react in the heat of battle, just as skilled athletes need to perform under pressure.

As a technical trader, the “why” doesn’t concern me. Stops are stops, targets are targets.

The range for the past three weeks seems to lie within the big yellow box.

Many breakouts are false; seeing the bigger picture allows us to take reasonable trades where resistance may give us better odds for a reversal.

There are many good traders out there like Bernie Mitchell; make sure you check them out and get an education from someone willing to mentor you.

It’s too costly in this business to learn from only your own mistakes. 

 

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Is that all there is?

The marginal higher high overnight was a good bluff but the bears called the bulls and after a morning and lunch stalemate the bulls gave it up.

Finding a good (safe) entry is not easy when the market begins to fall. Jumping in immediately seems to be the best way when support is broken. Manage the trade for a few minutes, determine the logical targets, and relax while the waterfall goes to work.

Like a football running back in open field, sometimes there is little opposition in a day like today. The would be tacklers are few and far beween once momentum begins to develop. Many times fast up = fast down. No support is built up, so not a lot of pivots to work through.

Code traders knew exactly where to take profits, leaving the party on cue fat and sassy.

One day wonders are often seen in bear markets. They scream higher one day and pathetically reverse the next.

No heroes out there, just staying with the major trend after the bounce ends shoud keep you out of trouble.

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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 shold 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 judgement 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.

 

 

 

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He was a giant among us.

In high school, I faced George at the plate a few times. Like the Ryan Express, he could really bring the heat.

Even then he had a major league fastball. Whifferoo was all I could do.

After I was set up with the high hard one, all it would take was two of his curve balls and another heater to send me back to the bench to collect a few more splinters on my backside.

I can still see and feel it all these years later.The pitch would start at my head, I would step back away from the plate, and I would watch pitifully as the ball would break right over the middle of home.

I used to call it the curve ball cha-cha.

Pop would say “Get your foot out of the bucket and stand in there and swing the bat.”

Easy for him to say. I certainly wanted to, as I needed to pee someplace after that experience. I guess a bucket would have come in handy.

As a trader, I still need that bucket sometimes.

Dad had it right:“Ya gotta swing the bat if you get the right pitch; Don’t look for a home run, just get the bat on the ball and take your singles and doubles.”

Shakeouts are part of the game. Grab the middle of the move and let the greedy try and grab it all.

So I have to stand in there and take the hard trade.

Longs and shorts were both taken out today as the 2nd quarter ended. Key support and resistance held, and range traders prevailed. Plenty of scoring for both teams.

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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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One of the most important exercises I do as preparation for the market every day is to play “the Five W game.”

Or: who,what why, where, when and how.

Where can it go today?

What are the support levels?

What are the resistance levels?

How can the most traders be confused?

What is the risk and reward of the trade?

What time frame chart is being used?

What is the emotion of the traders behind the trendlines?

Who is trapped and being squeezed?

Which team is winning and where should I join them?

Flexibility in our thinking ahead of time allows us to avoid being stubborn. When our predetermined stops, or our trailing stops are hit, we get the opportunity to:

  • Do nothing
  • Try a trade in the same direction again at another level
  • Reverse direction

Thinking clearly for a few moments on the sideline before acting is one of the most important things I do to remain limber.

It also keeps my trading account healthy.

 

 

 

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