Week 40

Trading Plan: Emotion and how to risk less

Are you wondering why you sometimes dont take a trade ever if there is a clear setup?

Here is a trick to get you into the right mind set to avoid fear based thinking:

When looking at a very bright LED flashlight at night you will get blinded and avoid direct eye contact, but when looking at the same flashlight at a bright sunny day you just smile and don't avoid looking directly into the flashlight. Conclusion: You have to put you in a winning position: In trading that is a comfortable trade size and a market that goes directly into your direction without blinding you :-)

Have a look at following picture, S&P makes a new high at 13:20 but the usually I wait before entering as it not a confirmed new high. In the past I would have waited and either bought above a blue bar (with a stop below the blue bar I would have been stopped out) or I would have waited for another new high.

Buying on new highs is sub-optimal as 1. you earn less (enter later) and 2. you have a higher risk (need to place a stop that is further away)

Solution: Buying on new higher Lows, simply by speculating that the price will not fall much lower than the last time it moved up a little bit, as you can see 13:30 was the minor low and on 13:36 the time the limit buy order should have been filled.

With this new buying (and selling rule) there is one string attached and that is the price can of course go much lower (maybe to 50% level, maybe to a double bottom) but all in all its much better to invest with a 10 ticks stop with this strategy rather than then the more risky approach with a buy stop order on a new high (that you still can you use if you are certain that a new rally will begin and the price will not pull back before the next major move up :-)

strategy works:

Week 39

Week 38

Week 37