Saturday, April 6, 2013

Waiting For Confirmation

There are some basic rules to trading for this account. One of these rules is to wait for confirmation of direction before placing a trade. Confirmation of trend means that the security closes a period of trading in that trend. The closing of the period within the trend is very important. You will read about this later in the post. This rule, when followed, has saved this account a lot of money. But, when this account has felt the need to be the early bird and trade before confirmation, losses have occurred on a regular basis. A couple of examples to share would be in gold and in the Nasdaq QQQ's.

A few months ago a trade signal went off on the QQQ's. After analyzing the trade, the account purchased some call options convinced it was in a bullish trend. This analysis included looking at the way the dow and S&P averages were moving as well as some bullish moves of stocks within the Nasdaq. What it didn't include was a confirmation close of the trend. Since that trade, the price has barely budged, and the calls were stopped out.

This past week showed a trade signal for being bearish on GLD . It was very close to support at $150.00. The plan is that if if breaks below $150.00, $140.00 would be a 3-6 month target. But from the recent experience with QQQ, a confirmation close would have to come first before a put trade of any kind would be executed. The trade almost happened. In fact, in pre-market trading on Friday, GLD was trading below $150, and the thought was that a trade would almost surely be made on Monday morning. For most of the morning, it continued trading below $150. But then in the afternoon it completely reversed and not only went back above $150.00, it closed the day at $152.81. That was more than a $3.00 intraday move. The waiting for the close was instrumental in this account not placing a losing trade. Had the account made the trade early in the day, it most certainly would have been stopped out by the end of the day at a loss. Because the account waited for confirmation of trend, trading capital was saved for another trade.

Waiting for confirmation generally will mean that the trade will never start at a bottom or a top. You will rarely sell at the top or buy at the bottom. But successful stories of that happening are few and far between. That is why you hear about them. What waiting for confirmation will do is protect you from trading too soon. This will no doubt save trading capital that in the end will be as much as any top to bottom trade will ever be. It will also increase the chance of overall profit, as trading commissions will also be less. It is important to have the rule of "waiting for confirmation" within your trading plan. Otherwise, the story might be about the trader who would love to trade but has no capital.

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