I have made and no doubt will continue to make plenty of mistakes in trading. You name it I’ve probably done it. The hope is that these mistakes provide valuable lessons to learn from to help minimize the damage when things aren’t going your way. Big losses are hard to claw back from. Not just from an account performance perspective but also mentally. They can really get in your head, kill your confidence, and have you making even more terrible decisions causing further damage. It’s how a lot of accounts get blown up. I’m sure many can relate.
One mistake I make quite frequently that I’m working on addressing is waiting on confirmation before entering a trade. I often see a chart and get excited about what I see. I always know where my exit is before entering (typically 2% – 5% depending on position size and volatility of what I’m trading) so I’m discipline in that area. Where I can definitely improve is waiting just a bit longer to enter until I get better confirmation price is likely to head in the direction I’m anticipating from the trade. If you follow me, you know I post quite a few charts of stocks that are coming back in to potential support (previous resistance). I like these setups because the risk is well defined. I know exactly where to get out and it’s just below the area identified on the chart. Here’s a textbook example I used in my video the other week of TUP:
Nearly perfect retests of former breakout areas can be seen in this chart. They aren’t typically this clean but this is a good example.
So back to my point of waiting on confirmation. When I see a chart similar to the above, I find myself getting excited when I see price coming back to retest the old highs and I often enter the trade right when it begins to retest. I believe my success rate would be higher if instead of entering as price was still moving down into this area to just wait a little to confirm price was actually going to respect this area. Sure, it might have me entering slightly higher but the win rate should make up for that and I’d reduce the number of trades I get stopped out of for small losses. For me, I think I need to be less concerned with the “perfect” entry and more concerned with putting the odds in my favor and catching the bulk of the move if it’s there.
Sounds great but what’s my plan? Well one idea, and a good one, could just be to keep an eye on the chart and wait for price to show it’s starting to move up. Since I work full time and can’t keep an eye on things all day long this becomes a bit more difficult. Some alternatives are to use buy stop orders to execute as price moves back above some predetermined level or to set alerts on the chart to notify me when this happens. Good options.
Another idea is to have a rules based type criteria to follow before entering. This is something I’m currently working on and wanted to share in case you find it helpful. The rules based criteria is helpful because I can add it to my screening process. Here’s a simple strategy I’ve been playing with for shorter term trades that I think can also be helpful to me in waiting for some type of confirmation before buying. It’s a simple EMA cross on the 65 minute chart using the 13EMA and 34EMA. Buy when the 13EMA crosses up above the 34EMA and sell when the opposite occurs. These time frames compliment my trading style well. After eyeballing a lot of charts to get a feel for the moves, I love having the ability to quickly back test this strategy as well. TrendSpider helps with this with their awesome strategy testing feature. See below for test results on SPY:
So definitely a promising strategy based on the results above which include plenty of trades. Here’s a look at the current chart with recent entries / exits. Note the most recent signal has led to some nice gains and would not be included in the data above as a sell signal has not triggered yet.
There’s never going to be a perfect strategy using parameters like this and just because something tested well in the past doesn’t mean it will work well going forward. These EMA cross type strategies can really chew you up in a choppy market. However, given the shorter time frame of this type of strategy, I believe this can be a nice compliment to my trading style and help as a “gut check” before entering trades to ensure the short term momentum has turned in my favor and I’m not swimming against the current.
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