We shared a new swing trade long based on the break that took place on Thursday at 37,550. Since then the trade has been fluctuating between green and red. Break of Friday's low actually generated a new sell signal. So what do we do with this swing trade?
I mentioned to those who followed it that they have two choices: exit early and take a smaller than expected loss, or hold it for the max risk which is the predetermined stop loss order. For the record, we are staying in and will let it go to the stop.
While the stop will be more costly, it is usually better to let the market determine the outcome of the trade and not interfere. This is the random nature of the market at work, and second guessing is NOT an effective behavior. Our risk was identified and accepted at the time of the trade. If we were not willing to take that risk, then why put the trade on in the first place? The trend has not changed, so we let probabilities play out.
What IF The Trend Continuation Pattern Fails?
32,500 is the key support at the moment and is likely to be the consolidation low. If this level is cleared, the next key support is 27,500. Both of these supports are high probability reversal points for swing trades. It is up to the market to setup and confirm. In either case, if we see a setup develop at one of these levels, we will be prompted to enter into a new swing trade long.
Levels Are RANDOM.
I am often asked if price reaches a level if it is time to buy. The level alone is not enough. Keep in mind the strategy I am describing here is a SPECIFIC rules based swing trade strategy. It is short term oriented and not to be confused with longer term investing. You need to know the difference if you want to manage risk successfully.
Price needs to prove itself at a level before risk can be identified. Having rules like this in place help to minimize bad habits, ESPECIALLY the ones newer traders develop in wild bull markets like we have just seen. Once the market returns to reality, or goes into a consolidation, many will realize this game is not easy.
Rules may also lead to missing moves occasionally, but what is better? Being in every move and coming out red in the long run? Or being in less moves while coming out consistent and green? Day traders especially need to realize this.
Thank you for taking the time to consider my perspective. I hope you find it helpful.