Swing High

It is obvious that I let the evil emotion of excitement get to me while trading, clouding my rational perception with a combination of fear and greed. When the markets rallied so hard into the close on Friday, they certainly showed strength. The daily chart of spy did have a hammer and thrusting pattern, which is a potential reversal pattern. The key word there being potential. A reversal pattern requires confirmation in order for it to be true. So while the reversal pattern was present, it was not yet confirmed (in this case, a close above Friday’s highs would have been sufficient confirmation for a reversal). I should have waited until Monday’s close to see if the pattern was going to be confirmed on the daily chart before entering the long trade [I trade EOD because I am swing trader and a student who cannot watch or trade the markets all day long ]. However, my emotional state caused me to enter a long position in a triple-leveraged ETF tracking the S&P 500 (UPRO), worth about 10% of my portfolio, at the close on Friday. Because I didn’t wait for the confirmation, as a prudent trader would, I stand to gain perhaps an extra 1% on the next up leg. However, I also run the risk of having a failed reversal pattern (and a move to the downside) while holding a long position in a triple-leveraged ETF. The smart money waits for confirmation, and in doing so, sacrifices that 1% for the security of the confirmed reversal, which puts the odds towards the trader who is bullish in this case. I should have waited, and I should have a set of rules to review before making any trade. This will help me make sure that my trades are rational and devoid of emotion. It will also improve my discipline (and perhaps develop a trading method that better aligns with my trading personality).

For the next 50 trades I make, I will force myself to consciously focus on a list of trading rules and check off each rule before making the trade. Rules will include things like: is the pattern confirmed, does volume support the move, is the broad market moving in the direction of this trade with conviction, do you have a 2:1 reward-risk ratio, what is your entry and why, what is your target price and why, when do you know you are wrong and need to sell, is the 20 day moving average above or recently crossed over the 50 day moving average, are bolligner bands expanding (or has price recently closed above a donchian channel recently), what is your protective stop going to be. I think I will stick to these fundamental trading rules for now. After I make at least 50 trades, consciously going through the steps of my new rules, it should start to become an automatic habit. If not, I will do it for another 50 trades. Also as I work towards automation, I will gradually introduce new rules to the list and analyze the change in my performance. Naturally, some will stick and some will not. I may even decide to cut out some of the rules and experiment with simplifying my rules into a few basic components.

If you think that I started this blog to impress people, you are wrong. If you think that I started it to get a following or gain market share in the over-crowded market of trading related websites, you are more wrong. If think that I started this blog to make money from viewers through subscriptions or adds, the joke is on you as I have no such goal. The truth is, I started this blog for me. It’s all about my personal development as a trader. Writing an honest review of my personal trading performance and criticizing my personal mistakes to benefit my trading abilities is one of best ways, if not the best way, to improve my trading skills and knowledge. That’s all I really care about.

The funny thing about this “blunder” is that I still do not know what the result will be. Some traders would tell me to close the position here, but I plan to manage it instead. I will give the trade a chance by waiting until the close on Monday. If the reversal is not going to be confirmed, I will exit my trade. If it does get confirmed, then I will hold. If managing my mistake was more complicated then I would probably just exit at the open on Monday. Thanks for being a part of Swing-High.com! Always trade with a stop loss and manage your risk appropriately. Money management and risk management are a couple of the most important aspects of trading, and yet they are so basic and straightforward. Capital preservation comes before profits… always.

Happy Trading,

Jason

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