The Mechanics of Trading
Aug 05, 2005
Readers of my articles and
reports have become familiar with my trading models and my style
of trading. Many questions have popped up from the inquisitive
minds of these readers, and instead of replying to each
question individually, I prefer to use real time, real trades
to illustrate the simple process I go thru with each trade.
First, there is analysis.
Second, we wait for a buy signal.
Third, we enter the market when the set up is favorable.
Let's look at the current
situation of a report I issued recently.
CHN - on 7/23, I sent out a
special report, putting CHN on the watch list.
Analysis - a bullish divergence on money flow, and a breakout
on very heavy volume.
Signal - a TLBBS was confirmed on 7/22.
Set up - buying the TLBBS would be at $28.77, placing a stop
below current pivot low at $26.52 would be risking 8%, that is
much too high as I normally do not risk more than 3% on a trade.
Therefore, although my analysis was bullish, and we had a buy
signal, I advised subscribers to wait for my buy alerts.
CHN - the pullback should
be at or near completion, wait for my buy alert.
Some readers of my report on CHN went and bought CHN on 7/25
after reading my report, without waiting for my buy alert, and
now suffering a 4% drawdown. If you must act on your own, again,
know your risk. Although we have a TLBBS, the risk was simply
too high because buying near $29 with a stop below current low
near $26 is risking 10%, that is much too rich for me. Price
has now pulled back and that risk has been reduced to 4% if we
enter now. But we will wait, I want to see a TL established and
risk reduced to 2%, stay tuned.
The above chart and commentary
was sent to subscribers on our weekend update dated 7/30. Again,
we have a bullish analysis, a buy signal, but until the set up
improves, we don't pull the trigger.
As it turned out, the downtrend resumes, and we have a BRSS (sell
signal) today. I will continue to monitor CHN, and will alert
again on a TLBBS.
As I often suggest, technical
analysis is nothing more than an educated guess. The market is
dynamic and subject to constant change. We must only enter the
markets on set ups, and a good set up is when we have a buy signal
and R/R is favorable. The most important aspect in successful
trading is not whether we are right or wrong, it is knowing our
risk with every trade and only trade when that risk is manageable.
Aug 01, 2005