Monthly Archives: January 2011

In-between Breakeven and Profit

The following is some great reader Q&A regarding a quite difficult part of the trade management process:

Question:

I have been trading for a long long time and always have had one obstacle I can’t seem to overcome.

I feel I can pick the Perfect or Near Perfect Trade setups.

I feel I can allow it to confirm to “take” the trade.

I always have “Money Management” stops in place.

I feel I can raise my stop to breakeven when I’m ahead enough.

Now comes the problem. I don’t know WHEN to take the profit and run.

Over the years I have tried all sorts of guidelines.

  • 50% retracement;
  • 100% retracement;
  • 50% out at 1st target with 50% at breakeven;
  • Middle bollinger bands
  • Middle Linear regression
  • Opposite Bollinger Bands
  • Opposite Linear regression
  • 618
  • gut feeling
  • Money management: gain of 1x; 2x risk
  • etc etc etc.

All of these are OK, IF I can pass the “in-between” area of uncertainty.

If I can get far enough ahead, I just follow up the stops to just below the previous pivot.

But it’s the “in-between” that haunts me.

Do I take the profit or put in a close breakeven stop.

If I choose either, sometimes the choice is great or terrible.

One time in the early 80’s, I put $750US into #2WSugar and in three weeks it was at $28,000US.

Didn’t know what to do.

Finally got out with $18,000US, which was great but it killed me to lose that $10,000 extra profit.

OK, this is an exception, I was stupid, I should have taken the money and run.

But even on the smallest trade I still have the same problem.

When to take the profit!

So after 45 years trading I’m still open to ideas and opinions.

Even now, I try to “listen” to many opinions about trading; some I reject immediately, some I ponder, some like yours I most appreciate.

I especially liked your thought conveyance that there is no Holy Grail, it takes hard work and experience to trade.

You make sense and deal in the “real world”; many many others don’t, they have gimmicks that work only for a moment then fail.

I have seen it over and over again. Your approach is most refreshing and “real”. Thanks!

So my long winded question is: When and How do you trade in the area “in-between” ? (In-between Profit and the breakeven point!)

 

Answer:

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What Does an Edge Look Like on a Chart?

One of the key topics that I’ve covered from time to time through my newsletter is that of profiting from the mistakes of other traders. It’s hoped that the small amount of repetition will help turn on some light-bulbs for the newer traders, and at the very least act as a nice refresher for those with more experience.

Of course, it’s important to always approach the topic from a new perspective, whenever possible.

Well, being an Aussie, I’ve naturally been brought up with the very Aussie idea of never doing any work if I can get someone else to do it for me. So, having just read an exceptional article by Adam Grimes of SMB Capital on exactly this topic, I thought I should just refer you to his article. After all, there is no better way to get a different perspective, than to hear it explained by someone else.

Adam explains this idea very well and provides several chart examples. You’ll find his article here:

(While you’re there, check out his other articles as well, and in fact the whole SMB blog. I’m a big fan.)

If this is new to you, here’s some of my earlier stuff on the same (or related) topics:

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Entering A Breakout Before The Breakout

A couple of years ago I produced a short video titled, “How I Trade Breakouts“. Have a look at it first if interested.

In that video I discussed the fact that I don’t like to trade breakouts. My preference is to trade the first pullback following the breakout. That’s self-explanatory.

As an alternative I also mentioned that I will aim to get in before the point of breakout, if I perceive a potential for a breakout to occur.

The following is a screen capture of an image in the video, demonstrating how a pullback prior to breakout can be used as an entry in the breakout direction, when our assessment is for a high likelihood of breakout. Such an entry should only be taken if the distance to the resistance (or support) area offers sufficient room to scalp a small profit, or scratch for breakeven, should the resistance (or support) level hold.

 

 

Let’s look at a recent example.

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When Does The Trend Change?

The following chart sequence shows a great example of how I define a change of trend. The chart is a 1-minute chart of the 6B. The market and timeframe are irrelevant though. The concept applies to all markets and whichever timeframe you’re using to define the trend. I just happen to currently use the 1-minute chart.

As a background to the price action we see price in an uptrend leading into a resistance area between 1.5796 and 1.5802. Momentum clearly slows as price makes three failed attempts to breach the area (1 x test of resistance and 2 x breakout failures), before finally breaking the swing low between breakout attempts 2 and 3.

I call this break of the swing low the “objective” change of trend.

 

 

“Objective” refers to the fact that there is no discretion involved. Price traded below the swing low – there is no doubt.

However, for me, a change of objective trend definition does NOT mean a change of trend.

I define a change of trend as requiring two components:

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