Like most children, my parents told me “when at first you don’t succeed, then try, try again.” But like all pithy advice, that maxim is only useful some of the time. The rest of the time, it can get you in trouble.
In my post of last Friday, I outlined a failed trade in the FTSE. I managed to find a head fake on the hourly chart and took a 25-pip loss. I was looking for a short trade and came a cropper (though my 3% rule minimised my losses).
Would it be madness to try, try again?
The first rule of trading: know yourself
Having taken a loss and been proved wrong the first time, how would a nervous trader behave? Would he or she be frightened off having another go? And would a gun-slinging trader just jump back in with both barrels, convinced he or she would hit the target eventually?
If you know you are a rather timid trader, then you must overcome your natural caution when you see another opportunity. Likewise, if you are more gung-ho, then you would be advised to reassess the evidence calmly before acting. Trading, as in all of life, is a balancing act. Good traders are always self-correcting.
I am a reasonably adventurous trader – and I had determined my original analysis was still valid. I therefore made another attempt at finding a trade on the short side.
I had my new blue tramlines in place and believed they were excellent lines of resistance (upper) and support (lower). If the market moved above my upper tramline, then I could infer the rally was not over. But the latest attempt to push higher was thwarted some distance shy of the upper tramline and failed to kiss it. That provided a clue that the market would likely now test the lower tramline support.
This was the chart last Friday:
If the market were to break that line, the decline should be substantial. That is because many of the longs who had gathered in the trading zone between my tramlines would have placed protective sell stops under the tramline.
I didn’t have to wait very long. On Monday, the market broke hard through my lower tramline and I was in with a short position (with protective stop just above the line).
Note that following the break, the market rallied to place a traditional kiss on the underside of the tramline and then peeled away. I like to see tramline kisses, because it helps verify that I have highly reliable lines of support (which were drawn in well before the kiss). My lower tramline is now a line of resistance.
My Fibonacci levels have confirmed my target
This morning, the market appears to be edging down towards my first target at T3. Remember, I always draw in T3 – a parallel and equidistant tramline – following a tramline break. That gives me a target to aim for.
I also drew in the Fibonacci levels of the latest large wave:
Yesterday, the market bounced off the Fibonacci 38% support in a textbook demonstration of how effective these Fibonacci levels are in forecasting support and resistance levels.
But my main target is still T3 where it crosses the Fibonacci 50% level.
I have now moved my protective stop to break even, following my rule. So whatever happens, I have a no-risk trade – unless the market catches a huge bid which could leap over my stop level. This is a clear danger for individual shares that do not trade 24/7, where an overnight news item can result in a huge gap opening. But it is far less likely in one of the world’s major stock indices that does trade 24/7.
That is why I prefer to trade these large markets where liquidity is greatest.