Link: Playing to Win or Playing Not to Lose

Feb 8, 2008: 8:48 AM CST

Dean Reese, contributor to the excellent and popular Trading Goddess blogsite, recently posted an article entitled “Playing to Win? Or Playing NOT to Lose” which underscored a major point I try to convey as well.

Paul at The Market Speculator also posted an informative article entitled “Winners Trade to Win” which deepens the discussion beyond that of Mr. Reese.

In “Winners Trade To Win,” Paul notes “In trading, playing not to lose will cause you to pass up on good trades and scare you out of trading volatile, yet lucrative markets.” Furthermore, “You know what happens when you focus on not losing money? You lose it.”

There is a major difference in the approach you use, and the strategies you decide to employ in your trading depending on your motivation. If you are playing to win, you will be more in tune with the proper mindset needed for successful trading, but if you are playing not to lose, then you will face an entirely different set of obstacles and challenges for you to achieve your goals.

I am highly familiar with the concept “Playing NOT to Lose.” I think it’s common for many traders to experience this after a large loss or a string of smaller losses. You tighten your stops, reduce your position size, take familiar trade setups, and the like. That is perfectly fine until you come out of your “trading slump.”

What is not fine is to adopt these principles 100% and utilize them all the time and make it part of your “trading personality.”

You really need a segment of your trading plan to address situations of great edge and probability and alignment with your understanding/interpretation of market behavior so that you can press your edge and earn large profits similar to the old saying “make hay while the sun still shines.” Often, a very large percentage of your annual profits will come from a small handful (5% to 10%) of your total trades. What would be the result if you “played conservative” or took an early stop-out on those 5% of trades? That would make the entire difference for you between profitability and not.

Dean gives us some guidelines and rules to consider regarding this topic of utmost importance. Visit his post and give some thought to your own trading and ask yourself about your overall motivation in an attempt to steer the difficult course between over-aggression and over-conservatism.

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We’re Going to Disney Land!

Feb 7, 2008: 8:49 PM CST

Ok, not literally, but investors in Walt Disney Inc (DIS) have enjoyed the recent rally in 2007. While the stock remains in a confirmed daily downtrend, the famous stock may be showing early signs of new life.

First, let’s look at this chart from an educational standpoint:

Notice the almost rhythmic wave-like structure in the price action. You can almost feel the ebb and flow of buyers and sellers as they fight for dominance. Disney is showing classic evidence for ’swing traders’ and the ’swing nature’ of price.

Notice the buy-side divergence in mid-November, as momentum was increasing while price was declining. That hinted that a counter wave was likely to take place soon.

Price – on the counterswing – failed to breach the falling 200 period moving average, and then a sell swing which took price on a major down swing that carved out a new momentum low shortly after 2008 began.

Notice the trade and structural set-up that occurred at the end of 2007. I call this the “Bollinger Band Squeeze” play, in which the volatility bands narrow decisively after a period of lengthy price-bar overlap has occurred and volatility has contracted. I circled this condition in purple.

Traders could have entered on a breakout by getting short, or by liquidating any long because of the strength of the sell-signal.

Price fell until the end of January, where the two back-to-back large volatility days occurred which have served as the bottom (for the moment).

The most recent price-pulse (impulse) swing has taken price beyond the key moving averages and now sits above the key 50 period moving average. Notice carefully how this level has recently served as support and resistance.

There’s two things to think about. First, “has price reversed?” We’ll see if price can make a higher high (unlikely) or a higher low (more likely).

If you think price is headed higher, don’t forget key resistance ahead from the weekly charts:

Does the picture look different now?

Odds now favor a sharp reversal due to key resistance from the weekly moving averages.

A lengthy momentum divergence is unfolding (or has already done so) and price has ejected downward from a clear head and shoulders top pattern.

Disney Inc (DIS) is an interesting study in how higher time frames can aid analysis, and how you can’t get overexcited by a signal on a lower time frame without scoping out the higher time frame shortly thereafter.

So are you still going to Disney Land? Be my guest!

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Intraday Action So Far – Gap Fade and Pivots

Feb 7, 2008: 11:41 AM CST

As we slide into the mid-day doldrums, I thought it would be interesting to look at the action in the DIA (Dow Jones ETF) so far to see some educational and trading opportunities in the price action so far.

Two lessons are forefront today from a technical picture:

First, the “Fade the Gap” strategy is experiencing some hiccups, as more traders have become aware of its recent “hot streak”

Second, the DIA has respected its daily pivot point levels very nicely so far.

First, let’s look at today’s “Fade the Gap” strategy.

I haven’t annotated it, but envision you see the overnight gap of approximately $0.80 (or 80 Dow Points) and you decide that you want to fade the gap back to $122.40 with a stop maybe 40 cents or so away from entry. Whatever the entry and stop you chose, you had immediate gratification in the first 10 minutes this morning (each bar represents 5 minutes of trading).

The market was off to fade the gap as you’ve been taught it would and you were excited. But wait! There was a reversal and a ‘hammer’ style candlestick just 25 cents shy of your target (yesterday’s close). How can that be?

If you held like the textbooks say (put a target in, put a stop in, and then let it ride and don’t micromanage – a tactic I recommend as well), then you watched your paper profits evaporate into a likely stop-loss on an otherwise excellent trade.

The market made a new low and violated its daily S1 (support 1) pivot (purple line calculated by TradeStation or your broker). You exit, exasperated.

In fact, you’re probably angry at this point and so you get “short” the market. Now you watch as price ejects in one massive up-bar candle and then rockets like you’ve never seen it before to fill the gap just as you expected it would.

But instead of a profit, you had a loss and if you got short, you had two losses!

Anyway, the point is that when a strategy becomes very popular and the crowd catches on, odds are that the market will act against those traders and foil them as only the market can do. Not only did the market come back and snatch their stops, but it embarrassed them mercilessly with a major price impulse from $121.40 to almost $122.20 in five minutes.

I would declare today’s pattern a “failed” or “busted” gap fade, even though the gap did fade.

The second lesson to learn is that of Market Pivot Points or Floor Trader Pivot Points.

My software calculates these automatically for me, but you can do so manually as well.

Notice how the market respects the pivots almost to the penny today.

The purple dotted line is the S1 pivot and the dotted blue line is the Daily Pivot Level. One can expect these to serve as initial support and resistance, and some traders trade exclusively off these numbers.

I have circled the points where the market hit the pivot and reversed. You can easily use these levels with other trade set-ups to provide targets, exits, and even stops.

Nevertheless, today’s intraday action has been baffling for some, and rewarding for others!

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Site Update: Print Feature Improved

Feb 7, 2008: 11:11 AM CST

Thanks to reader Dave Butcher, who recently worked with me to enhance the blogsite, you will now be able to print directly from the blog in a more professional format.

When you enjoy an article and want to print the article for your archives, simply print as normal and your page will be populated only with charts and text.

The header, blogroll, blog links, and advertisements will no longer show up on your print screen when you print directly from the Afraid to Trade.com blog.

I am further working on ways to enhance the blog and the readers’ experience here, and am still anticipating launching a companion website soon when I am able to perfect that aspect.

Please let me know if you have any suggestions, comments, or thoughts on how to improve the site, or what you would like me to begin offering in the future in addition to the daily blog posts. Please send any private comments to corey AT afraidtotrade DOT com.

I appreciate all your support!

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Hang Seng and Nikkei Drop 5% Today

Feb 6, 2008: 7:47 PM CST

Hong Kong’s Hang Seng ($HSI) Index plummeted 5% today, after ejecting out of a moving average squeeze pattern following a descending triangle technical pattern.

The Index fell 1339 points to close at 23,469. The frequency of gaps in the chart from StockCharts.com is due to how the software records prices and times, keeping in mind that the Hang Seng is open during periods where the data from StockCharts.com counts the market as closed.

Let’s look at the technical picture and what this damage may mean:

We saw the major decline near January 22, which marked a short-term bottom and corresponded with the US Federal Reserve’s decision to cut key interest rates by .75 to stem a potential global sell-off.

It appears that the global indexes beyond the Hang Seng have a further pathway to the downside (at least odds now favor that possibility) and this leaves global markets in a much more bearish position than they were only a few months ago.

Let’s compare the Hang Seng to the nearby Japanese Nikkei:

Notice how the Tokyo Nikkei Average, which fell just shy of 5% today, is printing a very similar technical picture to our own Dow Jones Index (and the S&P 500).

Notice the recent new momentum low combined with a near picture-perfect bear flag pattern into moving average resistance. Price failed directly at the declining 20 period moving average, which is a key spot that often sets up bear-flags and the “Impulse Sell” style pattern.

Global markets are far more connected than most investors want to believe, as evidenced by the current technical structure unfolding.

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