This is as important as my “Right Side of the V” concept. Together these two concepts explain a lot of how I traded MSTR and ARKK last week, Nasdaq futures in Jan ‘22, my prior GME write-up, and a lot of my trading. It’s so simple, yet so many traders mess it up!
WHY? Because these basics are the exact opposite of our intuition! Lesser traders chase stock higher, buying the higher highs. The stock then pulls back and maintains trend, but the weaker hands that they chased. Then they panicked out at the higher low. THE EXACT OPPOSITE OF PROPER TRADING!
OPTIMAL WAY: If the stock is trending higher, the way to trade is either to HOLD & CAPTURE the BIG PICTURE TREND UNTIL IT IS BROKEN, OR IF SKILLED AT TIMING, SELL HIGHER HIGHS & BUY BACK THE HIGHER LOWS. If the trend breaks to the downside, get out. Counter-trend can be traded using the same concept.
WHY IT WORKS: Bc most trends have wiggles. You can either hold through noise or use the ranges to your advantage. The key is that due to how price action of trends works, you are better off having less size the more extended up it goes & more size as it pulls into the uptrend.
The larger the ranges, the more benefit from trading the wiggles. Even if you don’t know how far each wiggle will go, I want to be scaling out on extensions higher and scaling back in closer to the lower high.
CAVEATS: Of course no way to know ad hoc if it will be higher low or will break the channel and stop out. That is true but misses the point! CHASING THE CONFIRMATION, THEN BAILING AT A LOWER HIGH PRIOR TO THE TRUE STOP IS SUBOPTIMAL TRADING! EITHER ONE IS BAD, BUT DOING BOTH IS RUINOUS!
Timing is more art than an exact science. Most trends don’t necessarily form a super clean channel, but the concept remains true for anything trending. Many chase the confirmation, then panic out at the lower high. Reflect on your trading to see how often you might do this.
Post Tags: trading