Wednesday, June 29, 2005

If prices go up here, I go Short


Have you ever had this feeling / intuition that, if prices go up to this round number, that resistance, you see on the chart, you will go short (vice versa for a long of course). You stick with your plan and you place your order, it gets filled and, if you guessed correctly, you will be rewarded with 5 to 10 ticks. You feel fine and you will repeat this trade until.. yes until it backfires badly, because your resistance is not just broken through, but broken through without ever looking back, without ever giving you a chance to get out at a decent stop. Why. Yes because the market has first trained you, that you have to trade these countertrades without or with very wide stops. It takes a while to stop and turn a freight train, so you will have made the experience, that eventually a lot of your trades would have been winners, if only you had given them enough room.

On the chart above a short 640.00 would have netted about 5 ticks after ER made a high of 641.20. Shorting this top into the next run fared a little better as it gave you 1.20 points after making the new high at 641.90.

But is that really the way to trade?
On a trend day sure no. If you think, you have identified a possible Support or Resistance, look for an entry signal now (use a lower timeframe, if your regular timeframe doesn’t offer one), take the trade in the direction of the trend and get out at the resistance you identified, if, yes if  you got a signal to exit.

On a range day, maybe. Look at this ER chart from just 2 days ago. ER trading in a 4 point range until it broke to the upside into the close.


Here you had to fade the previous Top’s or Bottom’s, just to make a bit of money.

But how to distinguish between the two types of markets, before they happen? I have a 20ema on my chart. If the Line on close which you see on the chart swings above the 20ema we are in an uptrend, if it swings below, we are in a downtrend and if it swings around the 20ema we are in a range. Too simple? Who said trading needs to be difficult?

Next simple market principle: After a trendmove follows consolidation aka range follows trendmove. It is rare, that you see V shaped moves, unless they are caused by news events, in which case it’s more like the market oscillating into the new pricerange. So add a few simple trendlines to your charts and you are set to go.

Just one thing more. To fade a market, you still want the market to trade already in your direction before you commit, meaning you trade with StopLimitorders giving up 3 or 4 ticks. Make sure the range you trade is at least 20 ticks, otherwise it is not worth trading. If you enter on a Limitorder be aware, that the train might need a bit of time before it stops and turns around. But don’t give it too much room, as you might just have faded the beginning of the new trendmove.