Trade or Wait
Having identified an uptrend, you need to decide whether to buy immediately or
wait for a dip. If you buy fast, you’ll get in gear with the trend, but on the minus side,
your stops are likely to be farther away, increasing your risk.
If you wait for a dip, your risk will be smaller, but you’ll have four groups of
competitors: longs who want to add to their positions, shorts who want to get out
even, traders who never bought (such as yourself), and traders who sold too early
but are eager to buy again. The waiting areas for pullbacks are notoriously crowded!
Furthermore, a deep pullback may signal the beginning of a reversal rather than a
buying opportunity. The same reasoning applies to shorting in downtrends.
If the market is in a trading range and you’re waiting for a breakout, you’ll have
to decide whether to buy in anticipation of a breakout, during a breakout, or on a
pullback after a valid breakout. If you aren’t sure, consider entering in several steps:
buy a third of the planned position in anticipation, a third on a breakout, and a third
on a pullback.
Whatever method you use, remember to apply the key risk management rule:
the distance from your entry to the protective stop, multiplied by position size can
never be more than 2 percent of your account equity (see Chapter 50). No matter
how attractive a trade, pass it up if it would require putting more than 2% of your
account at risk.
Finding good entry points is extremely important in trading ranges. You have to
be very precise and nimble because the profit potential is limited. A trend is more
forgiving of a sloppy entry, as long as you trade in the right direction. Old traders
chuckle: “Don’t confuse brains with a bull market.”
Specific risk management tactics are different for trends and trading ranges. When
trend trading, it pays to put on smaller positions with wider stops. You’ll be less
likely to get shaken out by any counter-trend moves, while still controlling risk. You
may put on bigger positions in trading ranges but with tighter stops.
Having identified an uptrend, you need to decide whether to buy immediately or
wait for a dip. If you buy fast, you’ll get in gear with the trend, but on the minus side,
your stops are likely to be farther away, increasing your risk.
If you wait for a dip, your risk will be smaller, but you’ll have four groups of
competitors: longs who want to add to their positions, shorts who want to get out
even, traders who never bought (such as yourself), and traders who sold too early
but are eager to buy again. The waiting areas for pullbacks are notoriously crowded!
Furthermore, a deep pullback may signal the beginning of a reversal rather than a
buying opportunity. The same reasoning applies to shorting in downtrends.
If the market is in a trading range and you’re waiting for a breakout, you’ll have
to decide whether to buy in anticipation of a breakout, during a breakout, or on a
pullback after a valid breakout. If you aren’t sure, consider entering in several steps:
buy a third of the planned position in anticipation, a third on a breakout, and a third
on a pullback.
Whatever method you use, remember to apply the key risk management rule:
the distance from your entry to the protective stop, multiplied by position size can
never be more than 2 percent of your account equity (see Chapter 50). No matter
how attractive a trade, pass it up if it would require putting more than 2% of your
account at risk.
Finding good entry points is extremely important in trading ranges. You have to
be very precise and nimble because the profit potential is limited. A trend is more
forgiving of a sloppy entry, as long as you trade in the right direction. Old traders
chuckle: “Don’t confuse brains with a bull market.”
Specific risk management tactics are different for trends and trading ranges. When
trend trading, it pays to put on smaller positions with wider stops. You’ll be less
likely to get shaken out by any counter-trend moves, while still controlling risk. You
may put on bigger positions in trading ranges but with tighter stops.
