By Mike Reed
www.tradestalker.com
QUESTION:
If the SP futures fall through support and go straight down
for another two points, and I want to get short, should I
a.) Enter immediately, b.) Two points below support, or c.)
Should I wait for a pullback and then try to get short?
You've
got to be patient enough to wait for entries that have two
things: First - a high probability of immediate gain,
and Second - a small potential for loss if the worst
happens and your hard stop gets hit. This principle applies
to all entries, and it's useful to think about it when
you're trying to decide whether to enter on a pullback or a
continuation of a move.
Entering
a trade on a pullback offers less dollar risk than chasing
the market because you can place your hard stop on the other
side of support or resistance and risk only a point or two.
(Of course, this doesn't mean you're going to hang around
and let the market hit your hard stop if things go wrong.)
Entering
on a pullback also gives you a better chance of gaining a
point or so in the first 30 to 60 seconds of the trade. This
is important, though very few people seem to be talking
about it.
I rarely
(almost never) chase the market. Here's why…
Usually,
if you chase the market for your entry, you'll get filled
about the same time the crowd's emotion is exhausted. The
market will pull back and you'll have to get out immediately
(if you're smart). On the other hand, if you're stubborn
and you don't get out immediately, you'll have to suffer
through the pullback and hope that the trend
continues before your stop is hit. If the market gets close
to your stop, you'll be tempted to move the stop away just a
little bit. Once you give in to the temptation, you've got
an expensive trading habit that may eventually take you out
of the business.
Whenever
you find yourself hoping that the market will
come back and get you out of a bad position, you really have
to head for the exits now. Don't even think
about the commission, or all the time you spent waiting for
the setup. Just get out!
QUESTION: What if there is no pullback?
If the
market breaks through support and keeps going down without a
pullback, you just have to be disciplined and let it go. All
the lost opportunity in the world won't take your account
balance down, but chasing high-risk, low-probability entries
will cost you.
Also,
market trends rarely go one way for too long before there is
some sort of counter-trend reaction. If there is a move with
strong momentum, I will focus on a 1 or 2 minute chart and
use dynamic support or resistance for a guide. A good guide
for trading strong trends is a 15 period simple moving
average on a 2 minute chart, and/or 9 and 18 period
exponential moving averages on a 1 minute chart. When they
are “describing” the price action, they can provide good
entries during a strongly trending move.