Wednesday, March 21, 2012
Unable to hold, exiting early I - Drawn out move
Human beings are naturally impatient and this often works against trading profits. While being unable to hold for long durations is far better than being shaken out, it can often cut profits deep enough to be of some concern.
For example, today if a trader bought b19 and held through the horizontal movement around b20-24, he would probably plan to exit on an L2 if the signal is good or on the third push up. Technically, he should exit when the price ticks below b37 or just above b35 (during b39) and then wait for more price action.
However, the sideways movement right after entry is likely to have caused him some distress and question the strength of the setup. He may consider the movement as BW and expect any BO above to fail and cause the market to drop below. He may read the bear bar b23 as a break in the trend or b21 and b23 as two interruptions in the trend making b26 a third push up to the ema and exit (or worse reverse his position). After all, thats exactly what happened at b10-13. If b21 had been a large trend bar with a strong close, he would have less of a problem sticking to his plan.
The solution to this to understand what b20-24 really is. Its an attempt to fail the reversal and many reversals have such a pattern right after if the entry bar is not a large trend bar. b15 was an fH2 that triggered off the first attempt to reverse at b9 and succeeded in failing the attempted reversal. b23 was a signal bar that attempts to fail the reversal off b19, making it an fH2 if it triggered.
Price action such as b20-24 is to be expected right after a reversal if the entry bar is small and the trader has two techniques to deal with it. First, take a first profit at +2 and move stop to breakeven for the remaining position. The very act of taking a profit increases your confidence in the setup and your trading in general. The act of moving the stop to breakeven releases anxiety since the mind perceives lighter risk. Once you hold through the first pullback, sticking to your plan becomes much easier.