Hello all,
here's a good example of how some very basic principles of price action can both keep you out of trouble and actually lead you to profitable trades.
I learned many years ago about the 50% rule and how it can often be a helpful guide as to where markets ought to retrace if they are correcting against the primary trend. Additionally, I learned many years ago too about always trying to ensure your average winner is bigger then your average loser. Should we ever find ourselves presented with a situation where a move back to the 50% rule equates to more then double the risk taken (based on your setup) we as traders should take that bet every day of the week. That was indeed the case with the German stock market through the late spring of 2015. After several failed rally attempts (which opened the door for short trades) this market finally rolled over, and as you can see the 50% level has now been comfortably hit.
Interestingly, that trade is now basically over as price has gone into free fall. At the very least, one should have taken partial profits on shorts with stops on remaining positions at or lightly in-the-money. We call this kind of setup our Hollywood Nic as one of our students absolutely fell in love with this strategy and does it on a daily basis across the entire market. One simple set of rules which can make you a very profitable trader.
The question now becomes, where does our next bottom come in? Ironically, the easiest answer is 'where the market previously put in a bottom'. Indeed, the chart suggests we should see buying support come in (denoted with horizontal lines) where previous up-moves where initiated and where previous down moves where halted. Additionally, those levels seem to correspond nicely with our concept of the ReLoad Zone (RLZ - that being the area between our Mtn Man 61.8 Fib and our Line-in-the-sand 78.6 Fib). Put these two together and we can clearly see, German stocks could still lose another 10% before we get into some serious support. While I do love using price levels, I wouldn't suggest you blindly buy should we tank into the 9000 zone. Indeed, I like my students to have at least three (3) unrelated reasons to do a trade. So while price may be one reason, consider adding volume and/or momentum studies as further confirmation of an idea. Considering the tenuous nature of the capital markets at the moment (China, Greece et all) and the fast approaching seasonally weak period for equities, I wanna see some serious evidence of a bottom before I get bullish .
Sadly, as price goes parabolic here, this is exactly when the public usually starts to pay attention. Since we see from the chart this market could still move lower before it hits support, there is a period here where the media may be able to whip up a public's frenzy. Should the public get swept up in a panic euphoria, they may actually be playing right into the "smart money's" hands.
Brian
The Rational Investor
p.s. Our new school term starts in about 3 weeks. If you need help identifying what your objects are, building and sticking to a trading plan or understanding trade setups then please consider joining our trader education program. Pre-registration is free and you get access to all our site's materials for free until the new term starts after Labor Day www.therationalinves...-trader-development/
Cheers
here's a good example of how some very basic principles of price action can both keep you out of trouble and actually lead you to profitable trades.
I learned many years ago about the 50% rule and how it can often be a helpful guide as to where markets ought to retrace if they are correcting against the primary trend. Additionally, I learned many years ago too about always trying to ensure your average winner is bigger then your average loser. Should we ever find ourselves presented with a situation where a move back to the 50% rule equates to more then double the risk taken (based on your setup) we as traders should take that bet every day of the week. That was indeed the case with the German stock market through the late spring of 2015. After several failed rally attempts (which opened the door for short trades) this market finally rolled over, and as you can see the 50% level has now been comfortably hit.
Interestingly, that trade is now basically over as price has gone into free fall. At the very least, one should have taken partial profits on shorts with stops on remaining positions at or lightly in-the-money. We call this kind of setup our Hollywood Nic as one of our students absolutely fell in love with this strategy and does it on a daily basis across the entire market. One simple set of rules which can make you a very profitable trader.
The question now becomes, where does our next bottom come in? Ironically, the easiest answer is 'where the market previously put in a bottom'. Indeed, the chart suggests we should see buying support come in (denoted with horizontal lines) where previous up-moves where initiated and where previous down moves where halted. Additionally, those levels seem to correspond nicely with our concept of the ReLoad Zone (RLZ - that being the area between our Mtn Man 61.8 Fib and our Line-in-the-sand 78.6 Fib). Put these two together and we can clearly see, German stocks could still lose another 10% before we get into some serious support. While I do love using price levels, I wouldn't suggest you blindly buy should we tank into the 9000 zone. Indeed, I like my students to have at least three (3) unrelated reasons to do a trade. So while price may be one reason, consider adding volume and/or momentum studies as further confirmation of an idea. Considering the tenuous nature of the capital markets at the moment (China, Greece et all) and the fast approaching seasonally weak period for equities, I wanna see some serious evidence of a bottom before I get bullish .
Sadly, as price goes parabolic here, this is exactly when the public usually starts to pay attention. Since we see from the chart this market could still move lower before it hits support, there is a period here where the media may be able to whip up a public's frenzy. Should the public get swept up in a panic euphoria, they may actually be playing right into the "smart money's" hands.
Brian
The Rational Investor
p.s. Our new school term starts in about 3 weeks. If you need help identifying what your objects are, building and sticking to a trading plan or understanding trade setups then please consider joining our trader education program. Pre-registration is free and you get access to all our site's materials for free until the new term starts after Labor Day www.therationalinves...-trader-development/
Cheers