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Three Ways to Lose Money

July 30, 2012

As we went into today’s cash session I was satisfied that an uptrend was in place, but the first couple of minutes of trading took us well above my support line. I placed my buy limit at the EMA and was filled for a profitable trade. Knowing when to use the moving average for entry rather than a support or resistance line is an important component of what I do – you can read more about it in an earlier post here on order entry.

There are three ways that I typically lose money on a position. The first is when I identify the trend incorrectly, or assume a market is trending when it is not. The second is when volatility stops me out due to a premature entry. And the third is when a trend draws to an end. Of the three, the latter is the one that I feel most comfortable with and resigned to – it’s just a completely unavoidable part of the process. My second entry of the day is a good example of this, and the breaking of the very same support line that provided my entry also signalled the death of the uptrend.

My next entry was to short a rally into the EMA and a resistance line. This was stopped out as the market began to chop through the remainder of the session. At what point can you recognise that the market has become trend-less and choppy? I’ve highlighted the sideways movement in grey. One thing you will immediately notice is that price oscillates around the EMA, causing it to change colour almost every bar as it is whipsawed back and forth. On the charts I post I am using the free moving average indicator available here. Identifying choppy, rangebound markets is difficult however, and there’s no point me leading you to believe otherwise.

As you can see, I put in an upward-sloping support line after we made a higher low, and this gave me a long entry and my final trade of the day. You can see another potential entry towards the end of the highlighted period. Quite apart from the fact that this was outside of RTH, I wouldn’t have been likely to trade here – the market had just become too range-bound.

View Today’s Chart Here

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