Tuesday, January 24, 2012

Investing: Day Trading Article Category

It seems to me that most countertrend trades are the result of individuals attempting to trade retracements in an established trend. As a trader, you will often be presented with some very enticing setups against the trend. Uninitiated traders often mistake these enticing countertrend trades for trend reversals and dive headlong into these setups, often with disastrous results.

From the onset, let me state that countertrend trading is the bane of trading success. Although there is a small cadre of very experienced traders who have mastered countertrend trading, the vast majority of countertrend traders find the practice detrimental to their futures account balance. While it may sound corny and overused, the saying "the trend is your friend" cannot be over emphasized.

The small countertrend trades that occur along established trend lines are called retracements. These retracements occur for a variety of reasons, but the generally they are traders established in a trend taking profits. These retracements vary in length, with shorter retracements generally occurring in a strong trend and longer retracements occurring and a weaker trend. I should point out, though; that the preceding statement is merely a guideline and you can find the occasional retracements of substantial length in a strong trend, and very strong retracements in a weak trend. However, stronger trends favor weaker retracements and weaker trends favor longer retracements as a rule of thumb.

In my trading, my general rule is to avoid trading any retracement in an established trend. Why? For the reasons outlined above, there is no established methodology to definitively divine the length of any retracement in any trend. That being said, probability tells me that since I cannot determine with any accuracy the length of a given retracement, I have to assume the worst and operate under the assumption that it will be short. Of course, there is no worse feeling than watching a retracement move 30 ticks before rejoining a trend, but there are enough 2 tick retracements in an established trend to reinforce my general rule; don't trade retracements an established trend no matter how enticing the set up may present itself.

In summary, I have briefly outlined a trading strategy for retracements that took many years to develop. The methodology is simple, but the emotional strain can be a substantial; I don't trade retracements and a trend and because I cannot positively identify, and a quantitative sense, the potential length of any given retracement. Lacking that key tidbit of knowledge, I have concluded that retracements results and poor performance regardless of the quality of the retracement set up. In a more general sense, retracements require me to initiate a countertrend trade, and countertrend trading is generally unproductive and unprofitable.

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