IN through the OUT door
|June 16th, 2011, 08:18 PM||#1 (permalink)|
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IN through the OUT door
Picture an event of your liking. It could be front row seats to a concert, or table at your favorite restaurant, or a ride on the world's fastest roller coaster. Whatever it is, it is someplace you want to be, something you want to see, some experience you are excited to have. I'll bet you'd be willing to line up and enter in an orderly fashion, even if that means waiting in line for hours. Not your first choice maybe, but you can deal with it because you want what's on the other side.
Now picture being in a crowded theater or night club and a raging fire breaks out. Do you think most people are going to line up to exit in single file? It's more likely they will panic, rush the exits, and quite possible injure someone in the process. Logic can be hard to find at moments like that.
Markets move based on fear and greed. Based on the two scenarios above, which do you think is a stronger force?
One of my favorite trade setups is when the majority of traders are short term bearish/bullish in a longer term bullish/bearish market. At the first sign of real trouble, like a confirmed breakout of a key support/resistance pivot, traders can flood the exit doors. Stop losses get hit in domino fashion, traders dump or reverse their positions, and those who try to hang on get to where they can't take the heat anymore. The faster it goes, the more jump on board, or off, depending on where they started. In my experience, this is the cause of many of the most impressive moves.
I like to try to pinpoint the first sign of trouble, like major volume stops or low volume tests, wedges, etc. I like to write on my charts where I think the daytraders, swing traders and position traders all have their stop loss orders and see how price action reacts when price gets near them. If you've been nailed trying to pick tops and bottoms, my guess is you have been run over at least a time or two by these powder kegs.
How do you know when support and resistance will hold? How do you know when it won't? Is it better to get in before confirmation and hope for a higher risk/reward ratio, or wait until the panic is obvious and scalp a few easy dollars?
Do you have a favorite ratio, wave pattern, COT setup, indicator? I have my thoughts on this but would enjoy hearing yours.
Good trading, stay safe!