I have a different view on what you stated in your earlier post about trend lines and buying when panic sets in on price action. For one thing, I never make trade entry and exit decisions based on a trend line. I would use it more as a filter. Price near trend lines in some markets and stocks are notorious for whipsaws and market games others can play like the floor traders and even the market makers themselves. The public really love their trend lines. They are enamoured with them. This is what makes those trades who take this approach fodder for the pro. However, there are exceptions such as the taking of false breakouts and the engineering of an entry for a setup by its trend line.
IMO also fading panic is an unnecessary and risky approach to trading that has the potential to burn the trader. Never step in front of a moving train which was likely moving well before the panic set in. And momentum can move price large distances in short periods of time which the short term trader IMO cannot afford to fade. Fading sentiment only works a very small part of the time in an established trend, and the trick is to determine when this will work and when it will not work. Timing is the essential element here, and in my experience, looking to fade price movement driven by panic has *never* been an ingredient of this type of decision. And it certainly is not necessary.
Finally, letting winners ride has nothing to do with "irrational exuberance". It has to do with understanding the market that you trade in, knowing the setups that you trade, and keenly observing the price action that leads into and follows the trigger of the setup, and how price behaves at resistance where it pauses. I also use price targets which I find very helpful. This type of analysis comes down to one of the most important aspects of executing the trade, knowing when and where to move the trailing stop up to as the price progresses, and when to move it aggressively up to price to force an exit.
I must take an opportunity here to state as a side note that I am finding that risk is one of the most tenuously understood elements of trading by traders. It behooves one to be cognizant of risk and the different forms it can take both in a market and in a given trade. The example of the scalper comes to mind who scalps for on average 1.5 to 2 point profits yet allows for a 2.5 or 3 point risk in their stop loss. And we are not talking about a catastrophic stop loss because it is hit too frequently by their trades that I witness. Or the SPOO trader who simply does not use any form of stop loss at all. There is calculated and managed risk, and then there is unnecessary risk. Many, and I do mean MANY that I find take on the latter. And the outcome is usually predictable.
Just my opinion.
Comments welcome as always.
Bob Graham |
