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December 15th, 2007 at 9:28 am
Re: “Letting the market come to you”
I see this error in my trading more often than I would like.
As traders, we are taught to plan our trades. Let’s say we have a downtrending market which is reacting up, we are aching to be short. The market is rising through 13620; we have identified 632 as resistence and we place a limit order at that level. The market comes to 628 and falters, maybe it touches 30 and starts to work lower. We desperately want to sell so we chase it down and get filled at 627. This action is easy to justify in our minds. As traders, are we not supposed to be flexible and adaptable? The market energy has turned and its going lower, should we not be with it. Aggressive action has worked for us in other of life’s ventures, why should it not work here, and so we go for it. But the reaction up was not quite finished, we jumped the gun, aggressively interpreting market noise as a reversal; inevitably the market touches 32 (our original planned entry level)and we are taken out on our 5 tick stop. Thirty-two was the high and now the market falls like a stone, it’s at 22 and dropping rapidly. We have got to be short so we sell “market” at 18 after which, it bounces to 23 and we are stopped out again for another 5 tick loss.
We are down ten ticks and flat; had we stuck to our original plan, we would have been up nine and gaining. What happened? Our aggressive adaptability did not pay off. There is a level of market noise which is always present. An ebb and flow between the bid and offer, a large order which kicks the market a few ticks up or down; when we reach to the edge of the envelop this dither is working for us, it has given us an edge. When we chase, just the opposite is true.
Sounds quite simple, why don’t we just do it? Because all of our human emotions and life’s lessons are working against us, and, there are times when you must “sell at the market” if you expect to be short.