GCM HELPING YOU FROM EVERY DIRECTION                    

 

             Buy & Hold Confession.

I confess.  I do buy and hold, but not for long.  I also sell and hold, but not for long.

The published article  you see here explains the what, how and why.  What you

read here explains an important part of what will  happen to your managed money.

However, even though he is right on the money in his thinking, he is discussing a

trade from the buy side only.  If you prefer to manage your own money, this article is

about as close to "the holy grail" as you'll ever get in trading.  Note the "patience

factor" and follow the process closely.

 

TRADING BREAKOUTS

After 15 years of trading, the one thing that still surprises me is how most traders handle breakouts. They let emotion complicate what should be a simple, rule-based and profitable strategy. Trading breakouts can be high risk, high stress, low reward and low probability—or it can be the opposite. The difference lies in how you enter this type of position.

Before getting into the details of the strategy, two market concepts are key:

1. The reason price moves in any market: Price turns at levels where demand and supply are out of balance. The consistently profitable trader is able to identify a demand and supply imbalance, which means knowing at which levels the real buyers and sellers are in a market.

2. The other side of your trade: Trading is simply a transfer of accounts from those who do not know what they are doing to the accounts of those who do. Consistently profitable traders make sure novices are on the other sides of their trades.

THE LOGIC

Area A in Figure 1 is the origin of a strong rally in price. Most breakout traders look to buy as price breaks to the upside from area A. However, this type of breakout entry is typically the sucker bet. Traders see price moving higher from area A and give in to emotion and buy into the initial rally. The problem is that by the time the trader buys the breakout of area A, price has moved so far that it becomes a high-risk and low-reward trade.

Instead, I let the breakout happen because it tells me that area A is a demand and supply imbalance. And that is exactly where the buyers are. Next, I wait for price to return to area A. When it does return to that price zone at C, I am an extremely interested buyer as I am confident I am buying from a novice seller. I know this because the seller at area C is making the two mistakes that every consistently losing (novice) trader makes. First, he or she is selling after a period of selling. Second, the trader is selling at a price level where demand exceeds supply.

THE SETUP

For longs, find a market in an uptrend by using a 20-period moving average. Next, identify the origin of a strong move and draw two lines around the price action to create a demand zone (such as area A). Then, make sure you can earn a significant profit. This would be the distance from area A to B, the highest high of the initial breakout before price returns to C.

THE TRADE

Buy at C when price touches the top black line and place a protective sell stop just below the lower black line. Adjust your position size so that you are not risking more than you are willing to lose. Place your profit target based on the high of the initial breakout B, which in this case would have you selling for a profit at D.

This type of entry works in any market and for any timeframe. No matter which market you trade, understand that behind all the candles on your screen are people and their emotions. Most will fall for the emotional trading traps set by fear and greed, while the others get paid from this novice group.

... from Sam Seiden in the free July 2009 issue of SFO Magazine

 
Text Box: TRADING BREAKOUTS After 15 years of trading, the one thing that still surprises me is how most traders handle breakouts. They let emotion complicate what should be a simple, rule-based and profitable strategy. Trading breakouts can be high risk, high stress, low reward and low probability—or it can be the opposite. The difference lies in how you enter this type of position. Before getting into the details of the strategy, two market concepts are key: 1. The reason price moves in any market: Price turns at levels where demand and supply are out of balance. The consistently profitable trader is able to identify a demand and supply imbalance, which means knowing at which levels the real buyers and sellers are in a market. 2. The other side of your trade: Trading is simply a transfer of accounts from those who do not know what they are doing to the accounts of those who do. Consistently profitable traders make sure novices are on the other sides of their trades. THE LOGIC Area A in Figure 1 is the origin of a strong rally in price. Most breakout traders look to buy as price breaks to the upside from area A. However, this type of breakout entry is typically the sucker bet. Traders see price moving higher from area A and give in to emotion and buy into the initial rally. The problem is that by the time the trader buys the breakout of area A, price has moved so far that it becomes a high-risk and low-reward trade. Instead, I let the breakout happen because it tells me that area A is a demand and supply imbalance. And that is exactly where the buyers are. Next, I wait for price to return to area A. When it does return to that price zone at C, I am an extremely interested buyer as I am confident I am buying from a novice seller. I know this because the seller at area C is making the two mistakes that every consistently losing (novice) trader makes. First, he or she is selling after a period of selling. Second, the trader is selling at a price level where demand exceeds supply. THE SETUP For longs, find a market in an uptrend by using a 20-period moving average. Next, identify the origin of a strong move and draw two lines around the price action to create a demand zone (such as area A). Then, make sure you can earn a significant profit. This would be the distance from area A to B, the highest high of the initial breakout before price returns to C. THE TRADE Buy at C when price touches the top black line and place a protective sell stop just below the lower black line. Adjust your position size so that you are not risking more than you are willing to lose. Place your profit target based on the high of the initial breakout B, which in this case would have you selling for a profit at D. This type of entry works in any market and for any timeframe. No matter which market you trade, understand that behind all the candles on your screen are people and their emotions. Most will fall for the emotional trading traps set by fear and greed, while the others get paid from this novice group. ... from Sam Seiden in the free July 2009 issue of SFO Magazine  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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