This terminology might be a bit confusing at first. It stems from a system I came up with when I wrote my first book, under which I noted that we can categorize all technical, directional trades into one of four categories:
Support or resistance holding
Support or resistance breaking
This is a very high-level categorization system, but it has stood the test of time—I use it myself and thousands of other traders have told me it’s useful in their work. Of course, it’s not perfect; trades might fall under more than one category, and there are certainly kinds of trades that do not fit into this system. (Examples might be quantitative mean reversion, relative value strategies, trading time and/or vol with options, and fundamentally-driven approaches… these are, by design, outside of the scope of the system.)
Last week, we started a “Pattern Trading School” in this Facebook group, and we focused on Trend Continuation. This week, we will focus on Trend Termination.
The name “trend termination” was carefully chosen. Many traders might call these trend reversal trades, but there’s a problem with that—do you really expect a reversal? Sometimes, maybe all we expect is a pause or setback in the trend. Sometimes maybe we just expect the trend to stop. It does not have to be a complete reversal of trend.
Also to be considered is the issue of timeframe. I would encourage you to keep this simple: focus on either one timeframe, or the higher timeframe. Don’t try to wrap three timeframes into this because that’s an invitation to paralysis by analysis. In other words, we can take a short on the daily because we think the daily uptrend is failing or perhaps because we think the weekly uptrend is failing… not because we think the 15 minute chart might be failing.
If these trades are new to you, here’s some background reading:
There’s an interesting discussion over on my MarketLife forum, in which someone asked the question “does anyone really succeed at trading?” This snippet pretty much summarizes his question:
What if trading is an illusion that cannot be mastered at all? Do you know (personally) anyone who lives from trading? I don’t… What if the whole “trading thing” is just a belief…? I dont know about you but I dont want to waste my life chasing illusion.
This is a question that I asked many times over the course of my trading career, and often after periods of considerable success! In fact, one of the low points of my life was a sleepless night where I just kept wondering if I could succeed and if anyone really did. (Ironically, this was after two multi-year periods of making decent money in two different asset classes and timeframes, but my initial attempts to trade the S&P 500 intraday were met with failure after failure. That experience brought me very close to giving up completely. Writing these words doesn’t really capture the soul-wrenching misery of that period of my life, but I certainly empathize with the writer asking the question.)
The simple answer to this question is yes. There are people who make a good living from trading, who do over several years, and who do so with some degree of consistency. That’s the simple answer, but the simple answer hides some important truths. Let’s dig deeper.
First of all, most people on the internet selling you trading things are lying to you. I’ve seen variations of gurus and experts come and go over the years, but I’m sure there are always new scams to be found. Even “verified track records” can be faked—several daytrading services have taken a few hundred dollars to six figures, but they’ve done so in illiquid stocks on the back of volume from their recommendations to clients. You cannot duplicate that edge.
Sometimes the gurus are self-deceived. I’ve seen many people with magic patterns or systems come and go, and years later you’ll discover they went back to school or pivoted into some other non-trading career. These people may have thought they had an edge, but they didn’t. Sometimes a guru will pick one of their thousands of subscribers who made money and make videos around this newly-minted millionaire’s success. Of course, survivorship bias is a cruel mistress (no one has written about this as clearly as Taleb), and you cannot replicate that edge.
Sometimes they are flat-out scamming or lying. Guys renting mansions, cars, or female models to take cool Instagram pics or make promotional videos—with almost complete certainty, they are all lying.
Why am I focusing on the negative here? Because for many developing traders these false success stories are the model to which they aspire. These false success stories will only lead you to failure and misery, but if we understand the common threads that tie them together, we can see more clearly.
What are these threads?
There is a secret method, ratio, or indicator that can make you a lot of money.
You can get stinking rich quickly starting with just a few hundred dollars. You should be able to double or triple your money every year (or maybe every month if you buy the Insider Express Millionaire Today video series!!!!!!)
No secret method
It is my sincere belief (based on decades of experience and much research) that those things are not true. It is possible to find small edges in the market, and you can find those edges in many different ways: technical patterns, relative value, options, fundamentals… all of these may offer an edge, but real edges in the market are very small. I keep quoting this line from Jack Schwager because I think it captures the essence of trading very well: there are thousands of ways to make money in the market, but the paradox is that they are all very hard to find.
And they are even harder to implement! Trading is not about being a baller and crushing the market so you can go sip a drink in the swimming pool. Trading is a grind of applying that thin edge over and over with discipline as nearly perfect as you can muster. It’s hard, and, frankly, it often sucks. The number of times you’ll do exactly the right thing and get kicked in the face by Mr. Market is mindboggling… but that’s trading.
You won’t have quick, enduring success. You might have quick success, but you won’t develop the skills to make money and to hold on to it for several years. I’ve said this over and over again in many different places and forums: the learning curve is really 3-5 years. If you’re thinking of giving up, perhaps after being breakeven for 3 years, you’re giving up too easily. You have to know this going in.
As for realistic returns, yes you can get very rich starting from a few hundred dollars. Back in the 1980’s, markets were different, so we have many success stories of people who did just that. You can do the same thing today… it’s possible, but it’s very unlikely. You almost certainly will fail. You probably have better odds buying lottery tickets. When I tell a hopeful trader that he isn’t going to hit the big money, even after a long discussion I can still hear his “yes, but it might happen.” If you buy a lottery ticket, you might hit the jackpot, but no rational person counts on that.
So, you must calibrate your expectations downward. You’re not going to make 100%+ annual returns with any degree of reliability unless you are risking so much you will eventually make a -100% return. (To be clear: that means you blow out and have to stop trading. And maybe you lose your house and everything else. (I’ve personally known traders who committed suicide—this is serious stuff.)) You’re going to make double digit percentage returns, with some years being better than others.
So, you aren’t going to get rich with that $500 account. You might, with excellent risk control and a little patience, learn to trade with that small account, but after the end of a few years of learning and trading you’ll have a few hundred dollars more in it. Not thousands. Not tens of thousands. Hundreds. But you’ll also have the skill of trading…
And you can apply that skill to larger pools of money, make those same (seemingly modest) percent returns, and grow. This is how you build a career trading.
I don’t think it’s worthwhile for me to list the people I’ve known over the years who have done so. When I know the dark place the “is it possible?” question comes from because I’ve been there myself. For someone in that place, no proof is possible. Statements can be faked. Stories maybe made up or irrelevant. What that person needs to see is a glimmer of success and proof in their own work.
What to do?
How to get there? The person asking this question has worked diligently for two years, and has accumulated over 600 test trades. (Let’s ignore my repeated admonishment that the learning curve is 3-5 years of hard work, for now…) He is focused on trading the shortest timeframe possible, and has no written trading plan (because, in his words: “I dont think it is of any use. I know patterns, I know risk-management… How writing down what I already know can help me? I think its a waste of time.”)
From this, a few suggestions follow:
You must have a written trading plan. Otherwise, what are you testing? Write it down. You think it’s a waste of time? It’s a waste of a few hours’ time at most, so why are you so resistant to doing so?
Most struggling traders have better success moving to longer timeframes. That would be my number one suggestion: If you’ve struggled as a daytrading, try swing trading daily charts.
Perhaps try another asset, but the timeframe issue is paramount.
The right way to think about your failures is captured in this quote from Thomas Edison when he was asked about his repeated failures to build an electric lightbulb: “I have not failed 10,000 times. I have not failed once. I have succeeded in proving that those 10,000 ways will not work. When I have eliminated the ways that will not work, I will find the way that will work.” I think the questioner has proven that trading Brent Crude on a 3 minute chart with his specific (not written down) exit techniques and entry patterns does not work. Great. Now what can you change that might make a difference?
If I’m allowed to wax philosophical for a moment, Edison was trying to replace the primitive oil (and gas) lamps of the time. Ironically, after many failures, the filament he succeeded with was a piece of carbonized thread—that’s a lot like a candle wick, isn’t it? Food for thought.
I’ve been quiet on the blog recently, but Tom and I have been hard at work coming up with some new and exciting things. While we have some great things on the horizon for our MarketLife clients, I want to share something with you today that is completely free, and might just help some of you out a bit.
We’ve been struggling for better ways to connect with people and to help people learn to trade. Part of the problem is that there are so many ways to trade and to find an edge in the market… it’s very easy for an experienced trader to only see things through the lens of his/her experience, and perhaps to miss much of value.
On the other hand, I’ve participated in a lot of Facebook discussions (traffic wrecks?) over the past few months… and the phrase “blind leading the blind” comes to mind. I’ve seen well-intentioned people give horrible advice because they lacked the experience to really understand what’s going on.
So… we’re going to try an experiment here. We have a Facebook group for MarketLife. Go there and join. (Be a good citizen and answer the survey questions when you apply to join. They are there to filter out bots and scammers. If you skip the questions we’ll simply bounce your application.)
We will spend a few weeks working through big-picture categories of technical trades. To structure the discussion, we will use the categories I used in my first book:
Trend continuation trades
Trend termination trades
Support or resistance holding
Support or resistance breaking
This is a very high-level categorization and every technical trade should fit somewhere in this universe. (For more information, read this blog post.)
We will start this week with trend continuation trades. Join the group, and feel free to post setups and/or trades you have made for group comment and critique. I realize this project could get out of hand, but I’ll commit to participating in the discussion heavily this week!
Come. Join us; ask questions. Share your opinions and perspectives, and learn!
I want to share this video with you, which is the stock market analysis I recorded for my MarketLife Premium clients for 6/5/18. Why am I sharing this? Well, yes, there’s the obvious reason that I’m excited by what I’m doing and I want more people to see my work, but there’s another reason–I think there’s information in this five minute video that will give you solid perspective on stocks for the next few weeks/months… maybe help you avoid some mistakes… and maybe even make you some money!
If you’d like to check out our MarketLife subscriptions, we offer two tiers of service (Premium and Plus) . All subscriptions start with a trial, and if you hate it I’ll refund MORE than you paid for the cost of the subscription–I’m that confident in the value of what we’re doing and what it can do for you that I want to take all the risk for you!
Check out the video, and, if you feel my analysis could help you trading, come and join us at MarketLife. Start your free trial today.
One of the things I’ve been thinking about recently is how to evaluate the quality of our decisions. This is a topic that traders probably don’t think enough about. Furthermore, much of the traditional advice is very bad and actively works against the trader trying to correctly evaluate her decisions. Let’s think about this topic a bit deeper.
The traditional advice
One thing about trading scams is that they are predictable and repeatable. In some cases, the scammer might even be deceiving himself. Facebook trading groups seem to be the current lowest common denominator for ignorant, mis-guided advice, and I recently saw a scam that looks something like this: A guy claims to have made a few hundred thousand dollars from a few thousand dollars in just a few months. If you buy his course (which includes a ton of really cool “I am” affirmations to be said daily) he will teach you how to do the same thing.
Of course, there’s nothing new here. There are lots of excited people buying his scam, though whether they are new and genuinely deceived or paid affiliates, no one can be sure. I watched his silliness with minimal engagement until I saw him give what must be the worst advice to give a developing trader:
You don’t need to keep a trading journal. Just keep your losses small. Journals are a waste of time.
What you need to do is to look at your losing trades and figure out what mistakes you made. Then, don’t make those mistakes again.
Then look at your winning trades and try to do more like those.
This is a particularly egregious example, but that advice, to look at your winning and losing trades separately, to avoid mistakes that gave you losing trades and to do more good trades, is pretty much the standard in trading education.
What’s wrong with this advice?
To a beginning trader (which we all were at some time), this seems like solid, obvious advice. Of course we want to make more trades like our winners and fewer trades like our losers, so what better way than to look at those trades and see what happened? Understanding the truth requires a deeper level of thinking.
To get to that level, ask yourself this question: are your trading results solely and completely due to your skill as a trader? Or is there some luck involved?
There are things in human experience where skill reigns supreme. Someone who has the skill will almost always succeed, with very few exceptions. From my personal experience, some examples might be: a skilled musician playing a piece of music, a competent chef cooking a piece of meat, someone threading a needle, or a skilled target shooter. In all of these cases, there might be mistakes and errors made, but you can pretty much bet that someone with skill will almost always accomplish that task.
On the other hand, we can think of cases where someone with supreme skill might sometimes succeed and sometimes fail: a skilled quarterback throwing a long pass, a golfer making a put, a poker player playing any one hand, or a trader making a trade. In these cases, we know there’s a very high chance of “failure” on any one trial. Maybe the poker player will fold the hand (but is that even a failure?) Maybe the trader will have a losing trader. (Ah, ask that question again…) Maybe a defender will tip the ball. So many things can play into the outcome that we can’t completely attribute success to skill.
Evaluating decision quality
Of course, we all want to make good decisions, and much of our training and education centers around learning to make better decisions. Even the mis-guided advice given by our trader above had a good intent—he wants to help people make better trades, but he misunderstands how to get to that result.
The problem is that the market is so random and outcomes are often not very well tied to decision quality. In other words, I can make great decisions in the market and have a losing trade. I can also make really bad decisions, sometimes strings of them, and make many winning trades. Of course, over a large sample of trades things will tend to work out as we might expect, but the point is that outcome from any one trade or even a few trades might have no connection to decision quality.
How, then, are we to evaluate the quality of our choices? The first, and most important thing, is to stop separating your trades into winning and losing trades before you evaluate them! Yes, I know this flies in the face of the advice you’ll hear everywhere else, but if you realize that good decisions are “just about as likely” to lead to good or bad outcomes (and vice versa) you’ll see there is no reason to look at your winning and losing trades separately.
Trade outcome is not a criteria you should consider. Rather, you should focus on the chain of decisions that led to making that trade. Some things we might measure are:
Was the action prescribed in our trading/investing plan?
Was the risk level correct, the trade neither too big or too small?
Did we account for factors such as market environment and potentially correlated risk?
Did we make any emotionally-driven errors, either in trade entry or management?
Why this matters
We know that most people who try to trade will fail to do so successfully. Even if we eliminate those who never took the pursuit seriously, the failure rate among those who genuinely tried and who worked very high is still disturbingly high. This failure rate is not likely to be due to any intellectual limitation (you don’t have to be that smart to trade well) or personality deficit (people with many different personality traits trade successfully)—I believe it’s due to people doing the wrong things and focusing on the wrong things.
The right things are often shockingly counterintuitive. Traders must learn to think in statistically-oriented sample sizes. Traders must avoid mistakes driven by cognitive bias, and to avoid the lure of the “obvious”.
If you’ve accepted that your trade outcomes are influenced, at least in part, by a noisy, sometimes random market, then think to the next step: your trade outcomes include a component of skill, and of luck. How can you evaluate trades to tease out the difference between the two? How can you better evaluate the quality of your decisions so you can make better decisions in the future?
Working with a mentor, trading coach, or teacher can cut years off the learning curve. For many, it’s the difference between ultimate success and failure. This is an important and powerful relationship, and I want to share some ideas for how you can get the most out of your work.
Find shoshin. Shoshin is a term from Zen Buddhism that means “beginner’s mind.” In practice, it means that we try to leave everything we think we know about a subject, and to approach study with openness, excitement, and as few assumptions as possible. Even when studying on an advanced level, we try to re-capture the beginner’s mind.Why do we do this? First of all, it can be very hard to learn something if you think you already know it. Some of what you think you know is undoubtedly wrong. Even some of what you correctly know might cut you off from a new insight. If you make your teacher fight through all your assumptions, it’s a lot of hard work!
This is hard and humbling, but the rewards will probably surpass all your expectations. (I have a recent, personal anecdote I might share in a future blog post.) One of the quotes that has always resonated with me comes from Suzuki Roshi: “In the beginner’s mind there are many possibilities; in the expert’s mind, there are few.”
Though this might seem to contradict the previous point, have goals and objectives. If you want to be a long-term fundamental investor, working with someone who is going to show you how to daytrade is not helpful. Working with a classical chartist might not be the quickest path to options trading success.The person you choose to work with can give you some idea if your goal is reasonable, but, of course, no one can tell you with certainty if it can be achieved—if you can do it. Discuss your goals so you both know the result you’re working toward, and the timeframe in which you wish to achieve it.
Also, be open to having those goals modified or nudged in a different direction. If you want to be a daytrader, expect that most of your work will be daytrading, but don’t balk if your coach suggests you learn about options or try swing trading. Looking at other assets or timeframes can give you a skill set you might not expect, and a good coach can often push you to grow in some directions you might not have expected.
Plan on working hard. Like many relationships, you’ll get more out of it, the more you put into it. You are not some pristine piece of clay that your teacher will shape into a masterpiece—you’re a person fighting to learn a skill that defies most people who try to learn it. You’re trying to transform yourself into a trader, and your coach, mentor, or teacher is there to help you do it. But be clear: you are doing it. The eventual success will be yours, but so is the work!Working hard, to me, has at least two meanings. On one hand, you do the day to day work, much of which will be guided by your teacher or coach. It also means that you ask the big picture questions and aren’t afraid of the answers. It means you dig deep when faced with disappointment, and that you aren’t afraid to try other avenues and approaches.
Look for and expect synergy. In the best cases, this relationship can call both the teacher and student to be better than their best, individually. Together, the results can be many times more powerful than anyone would ever expect. This doesn’t always happen, but a good working relationship will often spark powerful synergies. It only works if both people bring time, energy, focus, and skills to the table.
Communicate. That’s really the essence of most relationships. It’s easy to err on both sides; someone might approach a mentoring relationship too casually and think of his mentor as his buddy—that’s probably not the way to get the best out of either of you. It’s also not really constructive to put your mentor on such a pedestal that they are unapproachable. No matter what background or experience your mentor brings, s/he is still a fallible person.If something is good or is working for you, say so. If something isn’t or you just feel you aren’t connecting, say so. Your mentor may be feeling the same thing, or may be unaware. Many of these misses can be corrected with some very minor adjustments on both sides, so communicating openly is a critical step in success.
There are many places to find a coach or mentor, and this relationship can be formal or informal. It’s possible to work with someone at a much higher stage of development than you are, or to use someone who is right beside you on your path to help you grow and develop. Some of the points above might apply more or less in different situations; as always, adapt for your own case and situation.
Working with a coach or mentor can be a life-changing experience. If you decide to go this route, do some thinking about what you can do to give yourself the best chance of success and to be ready to get the most out of the hard work you’ll do.
I have received several questions about overtrading over the past few weeks. Each question touched on a different aspect of the problem,; this is a serious question that many traders are asking about (and many more are facing and don’t realize it!) Rather than choosing one question to answer, let me summarize them all here:
What is overtrading and how can I avoid it?
There are two aspects to the problem: first, identifying overtrading and second, not overtrading! Many people jump right to the second part without considering the first.
What is overtrading
Overtrading basically means trading too often and/or taking trades that don’t fit in the trading plan. There’s also another aspect to consider: taking too much risk relative to your account size, though I would usually think of this as number of positions rather than one oversized position. But what is “too often” or “too many trades?”
It should be obvious that this depends on your trading plan and methodology. For instance, a high frequency algo might trade hundreds or thousands of times in a session. Is that overtrading? Of course not.
On the other hand, a swing trader might be badly overtrading doing just 4 trades a week. This really boils down to discipline and to following your trading plan. Many traders find that reasons for overtrading boil down to basically two:
First, a trader might have a fear of missing a move. For many traders (especially short term traders) seeing a market make a good move in which they have no position, from which they can imagine they might have taken good profits, is more painful than losing money! This fear of missing out on a move can dominate the traders thinking, and it is consistent, if not smart, it’s consistent with this fear to take any and every trade that might remotely look like a tradable pattern.
The second way in which overtrading usually develops is driven by negative emotions—imagine a trader who has just had a string of losses, or maybe missed a trade, or maybe is just really, really bored. This trader might take a trade that is not in the trading plan out of anger or boredom, and many traders discover that a significant number of their trades start to fall into this category.
These are bad reasons for overtrading—fear of missing out and emotionally-driven trades, but there’s another reason that is more complicated because it is tied to some constructive truths about trading and probability.
A “good” reason for wanting to overtrade
Many trading problems are not pure problems; in fact, they are often built around some aspect of trading that makes sense. In the case of overtrading, many traders know (instinctively or through analysis) that the more times they are able to apply their edge, the more money they will make, and the more consistent their results will be.
Imagine if you have a coin that comes up heads 55% of the time. If we flip it once, anything can happen. But if we flip it three times, how sure are you that you’ll see more heads than tails. (Not very sure.) How about 10 times? (More likely, but still not all that sure.) 100 times? (Pretty sure, at this point.) Small statistical edges become more valid over larger sample sizes.
So a trader might naturally be inclined to find a system that will let her trade more often. This is the right direction, but each market, on each timeframe, only gives us so many opportunities. Traders will find that seeking more opportunities will eventually result in many trades that were not solid setups.
Taking more trades, up to a point, will result in making more money and in a smoother equity curve (over time axis), but the limit is that the trades must be fully justified and must belong in the trading plan. Taking trades outside of the plan will result in simply adding more random outcomes. While we might think these would be breakeven, because of the emotional component they are often solidly negative.
Correcting this type of overtrading is where the discipline comes in.
Solutions to overtrading
The goal is to have all of our trades match our trading plan as accurately as possible. It almost goes without saying that this is only possible if we have a solid and clear trading plan. (f you don’t have one, you really should. My free trading course will walk you through all the aspects of crafting your own plan.)
Once we have the plan, it’s important to evaluate our performance against the plan, and the way to do this is to ask ourselves if each and every trade falls within the plan. In fact, this is the critical “grade” for each trade; not whether it made or lost money, but whether it fell within the plan. Simply knowing and doing this can make a big difference.
This is an intellectual solution: knowing the importance of making sure every trade is captured in the trading plan and creating systems for rational review, then working to eliminate trades that do not fall into the plan. (It’s worth noting that perhaps some of the trades which aren’t in the plan should be in the plan; trading plans should grow with the trader’s experience.) Sometimes, the rational solution isn’t enough, especially if emotions are driving the problem.
Some traders know they are about to make bad, impulsive trades, but they seemingly cannot stop themselves from pulling the trigger. In these cases, solutions that address the emotional side are good. Two potential solutions are:
Create pattern interrupts when you recognize the conditions that lead you to make these trades, or the behavior that happens just before you make the “mistake”. A pattern interrupt can be simple and constructive: get up and go for a 2 minute walk around your office or write a quick journal entry. You’ll often find the urge to make the trade passes if you can break the cascade of actions that end with you making the bad trade.
Create consequences. Maybe you “cannot” stop yourself from making the bad trade, but you certainly can create and enforce consequences. If you’re a daytrader, take off the rest of today and maybe tomorrow. If you’re a swing trader, no new entries for a week. Maybe make a painful financial donation to a charity or organization you truly hate. Create some pain and then see if it’s easier to avoid the trades next time, now that you know consequences will follow!
This is an important topic, and it’s especially important because it’s not a beginner’s problem—it’s something that only pops up after a trader has spent some time learning and growing, but it’s also one of those roadblocks that can be the difference between success and failure, between having a career as a trader, and doing something else.
I change slowly. The last major change I made to my trading was in 2005, and the smaller changes I’ve made since then are tiny, incremental changes. Often, they’re just time-saving tools that have grown out of my coding work.
I also am very consistent: I use basically the same indicators (Keltner Channels and a modified MACD (the 3/10 oscillator)) on every chart, regardless of timeframe or asset class. I don’t think there’s a lot to be gained from trying to tweak indicator settings, since what we’re looking for are just broad concepts and structure on the chart.
So, it’s very rare that I find a new indicator idea that excites me… but I think I have. A few nights ago I was playing around with some ideas, had a little flash of inspiration (one of those questions that begins “what would it look like if we measured this in this way…?”) and have created a band/channel structure that I think is entirely new. I’m in the process of crunching numbers around it and looking at it subjectively on many charts, but I have to say I think I like this.
They are designed to do a few things better than Keltners or Bollingers:
respond in a specific way to both increasing and decreasing volatility
respond to changes in the momentum of a trend. (Both Keltners and Bollingers fail on this front.)
to measure volatility in a way that is more logical and consistent with the purpose of the bands. (For instance, the logical inconsistency of Bollingers’ standard deviation of price has always bothered me!)
I’m not ready to talk too much about these or the concepts driving them yet, but I thought I’d share some images and examples. If this pans out, you’ll be hearing more about it later!
Keltners are on the left. New bands are on the right. If your first thought it “they are the same”, look closer. If you think they are very similar, you’re right and that’s the intent.
One of the best setups I’ve seen in the currency markets was (note: past tense) the EURCHF.
After a multi-month uptrend, the currency pulled back into a picture-perfect bull flag. One of the few negatives arguing against a long trade was that the cross went a little parabolic in mid April, but that’s an acceptable and normal over-extension in a strong trend. At any rate, the length of the pullback was likely enough to work off any overextension, so this became one of the best buying opportunities I’ve seen in a long time.
A failed bull flag in the EURCHF
But… one glance at the chart above shows a strong (-3.3 sigma as I’m writing this) breakdown. What lessons can we extract from this:
First, this is one of the classic ways in which pullbacks fail, as highlighted in my first book: strong momentum against the anticipated trade direction. If you’re looking to buy, there’s nothing like a sharp collapse to tell you you’re wrong!
Second, we need to be responsive to information as the market gives it to us. If we are locked into a mindset that says “EURCHF will go up” then we might tend to rationalize or ignore a move like this. Seeing the market objectively tells us that this is probably not good for our anticipated long trade.
Third, no matter how great the setup looks, it’s still just a tilt in probabilities. In fact, I’ve come to believe that the “prettiness” of a pattern or the quality of the setup has little to do with trade outcomes. (That’s not a casual observation–that’s the result of analyzing hundreds of patterns and trade decisions made in real time.) I can find the best pattern possible, but I’m still just flipping a weighted coin. My results are only important over a large sample size, and the outcome of any trade is random.
In this case, most traders would have had no entry so there was no loss associated with this failed pattern. But if you did have a position, your task is simple and clear: follow your trading plan. Have your stop in place (mental or in the market) and get out of the trade when price movement proves you wrong.
A simple post, a simple pattern, but a lesson that can make the difference between success and failure.