Apr 16, 2014

Important lesson

I think we have witnessed something important which deserves a few words... and this was VERY IMPORTANT LESSON how to trade.
Do your homework (analysis), have a trading plan, trade your plan, self control do not lose your nerves. That makes the difference between a successful trader and someone who will lose his money.
If you have done this, you would not have been caught to the downside yesterday. If you have traded this two days look back and recap what you have done right or wrong - Have you been prepared? Have you traded your plan or the emotions took control? If something went wrong - why?

It is not that we saw some important move, but it was a priceless lesson, which we have to learn if we want to be successful traders. If you can navigate through uncertain moment like now (bottom or not,fake breakout) and squeeze a profit after such crazy volatile reversal than the rest is piece of cake:)

The analysis worked great the trading plan too... but what about Russell2000 and NASDAQ making new lows?
When you have a break out up/down what should you see? - The index moving higher/lower, not a rocket science:)
Look for confirmation - look at smaller time frame (hourly chart for example) the indicators, the bars in both directions, how it develops in time.
The indicators usually reset first (for example MACD moving to the zero line) and than shoot up/plunge with the breakout. The Bars in the direction of the break out are bigger than the one in the opposite direction and close near their highs/lows. Retests of the break out are usually short living (I would say 1 to 2 hours) and do not move deep bellow/above the breakout.
If you look at NASDAQ - hourly chart MACD double divergence, huge bar closing above the two bars from the break out, retest very deep and lasting more than an hour.... I would say all this are signs for a fake break out.
Trading - you follow the signal and open short trade at 3980(several points bellow the previous lows), What happens? The index just do not move lower instead it prints huge bar covering the two bars of the breakout.You wait for a while and it continue moving higher above 4000.... When it refuses to move lower it will move higher(we were expecting a short term bottom). Close the short position and open long around 4005.
Net result is zero for the day. What was the most import thing, so that you do not end with a loss? - not to panic:) and look at the charts.

Chart updated... what we have - choppy move higher, three days in a row gaps higher are met with selling. That is not what you want to see after an intermediate term bottom. Do you remember previous bottoms? short covering and buy the dip crowd pushed the indexes straight up. Does this bottom look like this?-No
Fibo retracement 50% was reached and there is enough waves to say X is finished. Corrections are ugly bastards:) and now I can not tell when and how X will finish(if this is X at all). What I can say at the moment - bellow 1835 and X is with high probability over, above 1865 and green becomes the favorite scenario.

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