Thursday, January 21, 2010

A Key to Executing Your Trades

Several traders have asked me to resolve a seeming contradiction: On one hand, I post indicators that track the market's trend status; on the other hand, I suggest that trend following does not work and that one should be cautious in trading what they see.

The resolution of this issue represents what has been, for me, the single best contributor to the profitability of my trading in the last couple of years.

And here it is, in all its simplicity:

I trade with the trend.

I execute the trade countertrend.

That is, if I identify an uptrend at time frame X, I wait for a pullback at time frame (X-1) to enter the market on the long side. If I identify a downtrend at time frame X, I wait for a bounce at time frame (X-1) to enter the market on the short side.

If I'm a buyer, I wait for the sellers to take their turn in the market and show me what they've got. If they cannot push the market below a prior low reference point, I'll buy and use that reference point as a stop.

If I'm a seller, I let the buyers rally the market and show me how far they can take it. If the buying dries up below a reference prior high, I'll sell and use that reference area as a stop.

If we have a good trending move and a weak countertrend dip or bounce, we'll usually at least test the prior highs or lows. That means that even a trade that doesn't roar to new highs or lows can often be exited with some profit.

That execution edge can make all the difference in terms of profitability; it has for me.



John Gilner said...

This approach seems to make more sense in some ways than buying strength (as I have been taught to do and have typically done) because waiting for the trend to actually begin AND hold a higher low on the first pull back confirms the trend. Maybe this entry strategy doesn't get you in right at the inception of the move, but I would wager that the success rate is higher IF taken in combination with the other confirming metrics (TICK, cumulative tick, net A/D, confirmations/non-confirmations, etc. Thanks.

kuch said...

This is a great post. Since the trend is still up with the S&P, you would take this pullback as a buying opportunity?

zircon-212 said...

Thank you for the clarification and for being open and honest about your personal trade selection. I think you need to put a much stronger disclaimer on the post. Many new traders will accept your technique as gospel and/or a part of the trading holy grail which can lead to big losses for the unprepared. Defining a 'dip' is extremely nebulous and defending that dip or adding to it because it works for the Doc can create headaches for a lot of traders.

madi said...

Bravo! This is the essence of high probability trading, clear and simple. Thanks for the affirmation.

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TWC Futures said...

Simplicity is the key to success in this business. For all of those with 15 page trading plans (or no plans at all), just follow this and execute flawlessly.