Thursday, January 28, 2010

Finding Opportunity in Loss: A Hallmark of Great Trading

Let's say I think stocks will break to the upside and I take a long position. The market goes my way initially, but then reverses. What looks like a valid breakout now shows itself to be a false breakout. I stop out of the position and take a modest loss.

That is good trading.

One trader I recently talked with took exactly those actions--and one more. He saw that the breakout was false, stopped out of his position, and took a modest loss. But he had mentally rehearsed what he would do under just such a scenario. He had told himself that if this long trade didn't work out, the market could retrace the entire prior day's range.

So he stopped out, took his loss, and flipped his position to be short.

He made money on the day.

That is great trading.

The losing trade set him up for a winning day, and all because he was prepared to act on opportunity, not just prepared to limit risk.



Jay said...

Yes, that is good. I've done that. Also, I used to learn from every single loss, and what shows my improvement lately is learning from a pass, a miss, and even learning today, from a gain. I had an anxiety attack in my second trade today bc i was thinking of losing my prior gain and ending up even or down on the day so I killed a winner after 5 ticks on NQ and take a look here, it's running from 1765, my entry, and now it's 1777. But what i learned was technical also, the TICK was at a level where it turned back before, but in this new uptrend that is Ok!

I'm going back now to paste my screen slides in to documents with text to form lessons.

- NQ Trader Jay

Matt said...

What you have just described is what I call a failed auction. It can be traded as a traditional setup and the logic behind it is based in profile theory. If the market is balanced(2-3 days of overlapping volume clusters) trade the breakout and be prepared to reverse the position if price returns below the original breakout level with significant volume, at that point you would stop out or try to scalp out of the position and look for a reverse entry. Expectation is for rotation to the opposite end of the volume cluster.