Sunday, February 22, 2009

Early Bird Doesn't Always Get the Worm

One of my greatest weaknesses in trading is greed. I want all of a trend rather than just being happy with a small piece of it. Unfortunately, this is also the source of most of my losses. I'm slowly learning to be patient and accept the higher probability trade of getting just a piece of a short-term trend.

One good filter to use is the 9 consecutive lows above or at a high pivot, or the 9 consecutive highs below or at a low pivot, which was first proposed by Joseph Hart. The above example is on the opening moves on Friday. We got a uptrend confirmation just before the opening bell, and the market stayed in an uptrend until it retraced 50% of the distance between Thursday close and Friday's open. Long positions were the high probability trade.

If you had used this filter Friday afternoon, you would have avoided a big loss in the quick upsurge after 1415 ET. After 1350 ET, no downtrend mode was confirmed, and the market was in an uptrend mode.

A short-term downtrend was confirmed after 1250 ET. As you can see, after the confirmation, there was still profits to be made with a short position.

I remember seeing a National Geographic show on some birds that nested in small caves (bird size caves) on the side of a hill. One chick broke out of its egg a few days before a sibling, and thus was faster and stronger. The younger, slower chick was slowly starving, because its older sibling was eating all the food that the parents were bringing to the nest.

One day, the older chick saw movement at the cave's entrance, and thought that it was the parents bringing more food. It rushed to the entrance only to be eaten by a snake. The younger, slower and weaker chick stayed quiet in the back of the cave. The snake did not see the younger chick, and moved on to another nest. The younger chick now had no competition for food, and grow to adulthood to pass on its genetic code to another generation.

In trading, it is many times better to be the slower chick.


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