Weekly Insights: One of My Favorite Trading ‘Set Ups’
One of My Favorite Trading ‘Set Ups’
Recently, a fellow emailed one of our Higby Barrett analysts and asked, “Without giving away any precious secrets, could you tell me a way to improve my entries and exits (on trades)? It seems nobody wants to share their system.”
The following is the analyst’s response:
“Well, first, I do not have any trading “secrets.” What I do have is many years of market experience, including studying the markets and technical analysis – and listening carefully to the best and brightest traders share their philosophies on successful trading. (You should be suspicious if anyone tries to tell (or sell) you any trading “secrets.”)
“On better entering and exiting trades, first you need a trading plan – before you enter the trade – and you need to stick to it. Your trading plan can have different scenarios and options once you are into the trade, but the key here is to not ‘fly by the seat of your pants’ when you are into a trade. You do not want to let emotions dictate your strategies while you are actively trading a market.
“Know how much money you can stand to lose and then place a protective buy or sell stop accordingly; do not change your mind when you are in the middle of the trade.
“If you got a winner going, you should also have a plan in place regarding when to take your profits. Again, your trading plan can allow for some flexibility once you are in the trade.
“More specifically, I like to ‘buy into strength’ and ‘sell into weakness.’ This trading method abides by the old trading adage, ‘The trend is your friend.’ Conversely, traders who try to ‘fight the tape’ and be a bottom-picker or top-picker usually wind up getting their fingers burned.
“One of my favorite trading ‘set-ups’ is when prices have been in a trading range or congestion area on the chart – between key support and resistance levels – for an extended period (the longer, the better). Then if the price ‘breaks out’ of the range (above the key resistance or below the key support), I like to enter the market – long on an upside breakout or short on a downside breakout. A safer method would be to make sure there is follow-through strength or weakness in the next trading session in order to avoid a false breakout. The trade-off here is that you could be missing out on some of the price moves by waiting for an extra trading session.
“If you are long in the market, set your sell stop just below a technical support level that is within your tolerance for a drawdown. If you are short, set your buy stop just above a technical resistance level that is within your tolerance for a drawdown. Do not set your stops right at support or resistance levels, because there is a decent chance that those levels will check and possibly reverse the price move – and you will miss getting stopped out.
“If you are got a winner and decide to let your profits run (per your initial trading plan), use trailing stops that utilize technical support and resistance levels.”
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