When I was in my early 20’s, I found myself at the blackjack table while vacationing in the Bahamas. Never having played the game but chock full of liquid courage, I was blissfully ignorant of the fact that I was rapidly hemorrhaging cash, losing many more hands than I was winning. However, before my losses got to the point of doing any major damage, I received a bit of advice from an unexpected & surprising source.
After playing numerous hands without hardly a word spoken from the dealer, suddenly he muttered something indiscernible under his breath. My wife (girlfriend at the time) who was the only one standing next to me at the table and I looked at each other as we weren’t sure what the dealer had said or if he was even talking to us as he kept his eyes on the table as he spoke (in hindsight, I imagine that was to avoid garnering the attention of the pit boss or the eye-in-the-sky). I asked him what he had said and only slightly louder, in that distinct Bahamian accent, he repeated the statement: “You’re playing contrary to da game, Mon”.
Imagine my surprise when the dealer of a casino of which he is employed & makes a living from advises me to stop playing for my own benefit. As this kind man risked his job (as I would assume he would be fired or reprimanded for advising a losing gambler to stop gambling in the casino), I sincerely thanked him for the advice, dropped a $20 tip on the table (a fraction of what I would have likely continued to lose) and walked away a wiser man.
As a trader or investor, buying high and selling low is playing contrary to the game. This is an obvious statement of course but something much easier said than done, especially to those new to the markets and even some seasoned traders. Barron Rothschild is credited with the saying “The time to buy is when there’s blood in the streets.” While that statement applies to investing, the same premise holds true on a shorter time frame when trading. Essentially, as a trader, one needs to be comfortable buying (going long) when the masses are tripping over each other to sell. One also needs to be selling (closing longs or shorting) when just when things couldn’t look more bullish, such as the strong rip into resistance yesterday. After nearly three days of strong gains in the US markets, both the SPY ($SPX) and QQQ ($NDX) closed at key resistance & a key Fibonacci retracement level on the QQQ (the major index clearing leading this downturn in the US markets). As impressive as that rally seemed, the technical evidence still supported the fact that it was most likely a counter-trend bounce in a larger downtrend that began over a month ago and had yet to run its course. To expand on that statement, the technical evidence that I am referring to was not derived from anything that I saw during the recent 2 ½ day rally, more so it was the technical posture of the charts and the bearish case that was made leading up to the March 7th market top in the QQQ, such as this large bearish rising wedge pattern posted back on March 5th.
Those who have followed RSOTC for any period of time have probably noticed that the majority of my trades are entered in one of two ways: 1) Breakouts above support or resistance. Most long setups trigger an entry on a break above a well-defined resistance level, such as a downtrend line or horizontal resistance level, typically part of a bullish chart pattern formation. Ditto for short trades except using a break below support instead of a break above resistance as the entry criteria. 2) Another entry criteria that I often use for short trades is a bounce back to resistance after the trade has already broken down from a pattern or, at times, I will entry a short trade well within a bearish pattern, such as at the top of a bearish rising wedge, if my expectation that the pattern is nearly complete and prices are likely to start moving lower and then go on to break down below the pattern. Although the latter method has a higher failure rate than the former, the much larger profit potential more than evens out the R/R (risk-to-return ratio).
Shorting while prices are still within a bearish pattern (and going long within a bullish pattern) in anticipation of a breakout is certainly a more aggressive trading style and not for everyone. Whether one chooses to take the more conventional route of going long or short a breakout of technical patterns or to opt for the more aggressive style of establishing a position in anticipation of how a potential pattern is likely to play out, the most important thing is to be avoid the urge to let short-term market action, such as the strong rally off the lows on Monday afternoon in the close yesterday cause you to deviate from your plan. BTW, the markets opened today about where the closed yesterday, offering another shot at adding short exposure at those levels before the plunge today.
For example, assuming that you agreed with the bearish scenario that been laid out on the 60 & 120 minute charts since prices were at the top of the wedge but you held off on initiating some short exposure because the talking heads on TV were cheering the new all-time highs in the market. Then as prices moved lower from there and went on to break below the pattern & once again offer another objective shorting opportunity on the March 12th backtest you still held off due to the very sharp bounce that day. If, finally after the big plunge in the markets last Friday you decided that maybe this sell off might have some legs & so you started shorting. Then, after the impulsive rally off of Monday’s lows you decided that the correction was over, since how could the bears still be in control with the market moving higher with hardly a pause for nearly 2 ½ days? If, at this point, you decided to cut the losses on your ill-timed short entries (taken near the lows on Friday’s convincing sell off) and even buy some longs in order to jump aboard the next big leg up in the market now that the correction was clearly over, then you are trading “contrary to the game”.
Buying low and selling high is not easy…at first that is. After trading for a while and learning to pull the trigger on that buy (or sell) order when it looks like the sell off (or rally) will never end assuming of course, that your analysis of the charts confirm the entry, then not only will shorting into a strong rally like we had over the last couple of days not be a difficult decision, you will actually welcome it for providing such beneficial entries or add-ons to your favorite short candidates, even if it meant watching some of the gains on your existing positions evaporate during the rally.
On a final note, using this anticipatory trading style doesn’t always pan out. On many occasions I will highlight a stock dropping to support or bouncing to resistance as an objective entry only to see the stock continue to rise or fall through that level and never look back. This is where prudent money management comes in. When shorting rips to resistance or buying dip to support, determine where to place your stops and don’t let a trade get away from you if your analysis was wrong. For example, I stated yesterday that although I thought the rip back up to the resistance levels on the SPY & QQQ charts was a gift for the shorts, I also stated that I would not continue to add to my shorts above those levels. Part of my reasoning is because those were well defined resistance levels which were also near the top of the typical counter-trend retracement range of 61.8%. Unlike many traders, I do not abide by the rule “never average down on a losing position, only average up on a winning trade”. I will often scale-in or average down on a trade but only up to a pre-determined point, which is typically not far from my stop level on the trade. I hope this helps shed some light into my trading style. As always, feel free to contact me if you have any questions. Now back to the charts!
[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]