Monday, February 19, 2007

Trade analysis: Hope or Good advice

While I'm writing this article I'm in a DAX long position at 6999

I took it from a 500V chart

When I took the trade it looked as if it would form a ZLR (zeroline rejection of the CCI 20) and break that Top put in last Friday .

My standard Stop is 20 ticks, so while I'm writing this I'm still in the trade, even if it went down to -16 and is -10 according to this chart.

One of the trades I often taken is a ZLR plus Sling after the CCI has changed trend (from green to red).

Being long I sure hope this ZLR wont work and turn instead in a Shamu, meaning making an ~ pattern on the zeroline and turn up from then.

Having hope is one thing, but is there reason as well?

I have a few times written about the figure of the external observer. A technique introduced to me by Brett Steenbarger, who recommended it in his book "The Psychology of Trading".

What do you do? You place yourself in a state of mind, where you imagine yourself being a third party, a mentor having the task to council another trader, who is currently in a position and asks your opinion about it from a neutral standpoint.

As mentor you are flat and you have 3 options:

  • Stay flat
  • Go long
  • Go short

If your advice is Go short, you would tell the trader to exit the position immediately.
If your advice is Go Long, your advice would be to stay in the trade.
If your advice would be, that it's best to remain flat, then you would tell the trader to move the Stop to a position, where you as mentor would go short.

We know the 500V chart and objectively there is a Short signal on this chart, but if I make a trade decision, it is based on the 9minute chart combined with the 30minute chart to know the trend. The 500V is used to finetune an entry.

So let's look at the 9minute chart

Now that chart tells a different story altogether. Here we see also a ZLR, but it's a long ZLR and based on that chart I would take a Long right now. Especially after seeing the open GAP being closed. But let's take a look at the 30min as well:

Trend on the 30min is long, a 30min long signal is a few bars away, if any will be present at all as the CCI might as well settle on the +100 line, meaning DAX might turn into trend up.

So objective analysis (or something as objective as I can muster having still in the background of my mind, that I'm already in a position and a position 10 ticks down actually) tells me, that I should have waited for the signal present and taken a Long right here, or considering the 500V the moment the 500V forms that Shamu. But then DAX would be at 6996 at least and again fairly close to the Top of Friday.

No, if I were flat I would take the long right here 6994.

Target 10 ticks as that 7000 resistance is a big one and will need some volume to break, so better safe than Breakeven plus 1 tick on a rejection of that resistance. The Stop would be at 6987, 1 tick below Fridays close.

And as I'm actually in a long position, it means I remain in that position, but put the target to 6999.5. Yes I hate paying commissions and I "hope" DAX will test this 7000 number, if only to knock out some DAX futures options, even if the majority are based on the DAX cash index, which still trades about 15 points below that 7k number.


Btw the 500V did not form a Shamu, it just reversed forming a V-pattern.

A pattern I really have problems with trading it, as it gives no clear entry signal, unless you take the cross of the Zeroline as signal, something I don't do. But by looking at longertime charts I got a signal not present on the shortterm chart.

Now that I finish this article DAX trades at 7009 and I have to ask myself, should I have stayed in the trade? But no, the trade was a dumb one actually. I did not respect that resistance at 7000, I should have waited for a wiggle before taking the long and I took a prudent, money management based exit.