Wednesday, April 16, 2014

A recent failed trade

Here is a recent long trade which failed and resulted in a quick loss being taken. The chart below shows there was a clear level of resistance which acted as the trigger for entry. Price initially went up before starting to reverse course. At the point where price started moving below our entry trigger level, we exited the position. As you can see, price has continued to move downwards.

This sort of price move is typical of my losing trades - a valid set up which may initially move favourably before price reverses, triggering a small loss after a few days. The theory here is that, on a long trade, once a breakout to a new high is made, price should not fall back below that level - a case of prior resistance now acting as support. On a short trade, the prior support level which would as as the entry trigger should act as a resistance.

In his Market Wizards interview, David Ryan talked about this, and his plan of action when a stock re-enters its prior consolidation zone. His thoughts acted as a basis for my modified stop methodology, which I describe in the addendum to my e-book.

The principle here is simple - act quickly and ruthlessly with any losses, even if it means having a trade open only for a day or two. You don't want your capital tied up in non-performing trades, or to give a small loss the chance to become a bigger loss. Just get out and move on.

By doing this, my average losses equate to only -0.4R - less than half my initial risk per trade. This allows for any slippage or possible a gap down through my initial stop level, and keep those losses to a minimum.

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