After continuing to read Trading In The Zone over the week-end and reading Scott Farnham's blog at Fear & Greed Day Trader, I decided to turn the page on my old style of paper-trading and move on to trying to trade with the trend. As regular readers know, I typically fade the momentum in anticipation of reversals of direction. Instead of selling if I don't get a good entry, I often add to my losers (scale in to average a better price). This is, in virtually every experienced trader's opinion, a faulty approach. I can't agree more and have known it for a long time. But, I was able to manage it into consistent gains. The problem isn't that it can't produce winners, it is the fact that in certain instances, the reversal doesn't come! Further, when gains are picked up, they tend to be relatively small, muted by the fact that the initial poorer entries on the position hold back the gains. And, without stops, the pain is potentially huge when the reversal doesn't come. This is not the way I'd like to trade my real account when the time comes.
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So, today I got to the markets late; around 2:30pm. I had studied F & G Day Traders blog most of yesterday, doing research on his charts dating back to last June. I was trying to identify, as best as I could from a static chart, where his entries were taking place. So, today I decided I would only ride the momo! Well, like a couple weeks ago when I tried, I got chopped to bits as my mental stops were continuosly hit after I would buy or short at a point I thought resistance/support was crossed. I'm not accustomed to taking losses one after another like this! I was stopped out for losses on 4 of my first 5 trades and a 6th broke even when I stopped out. The one winner of the first six was a long trade which at one point had been a gain of up to 24 cents per share but then reversed instead of trending; I preserved the small gain by exiting just before it hit my stop. Very Frustrating!! So, I decide to persevere and do it again, going long on SKF... just as the big market eruption took place EOD. Caught on the wrong side and not wanting to get stopped out again, I decided to play my old way of fading a big move. This was a BIG mistake. First, I had a very bad entry for using my old style of trading, which really put me at a huge disadvantage from the start on this position. Then, the retracement a bit later was not enough to bring me up to a gain on the whole position, although it did bring me to even... (had I been using my old method from the outset on this trade, this retracement would have given me a reasonable gain and I would have sold as I have been accustomed to doing) But, it was not to be and SKF continued to pile drive down as the markets zoomed up. Finally, I decided to just quit on the "hybrid" trade ( hybrid as a result of trying to mix my old trading style with my new one). I then went to trying to get some gains out of the volatility by scalping. This gave me 4 out of 5 winners to close the session.
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If I had been on my toes, I would have waited and shorted at the LOD on SKF and ridden the momo as it plummeted on the big EOD move down. I find the the difficult part of this new method is trying to determine which break of support or resistance is real. Clearly, if I were to play every one as I was a few weeks ago and again today, I would mangle my account with small losses from continuously getting stopped out. "Death from a thousand paper-cuts."
I fully expect this trend of losers to continue as I adapt to this new style of trading; the correct style, if I want to be successful long-term. I will expect to use my old style when it feels appropriate to do so because with it, I can often get some great entries on nice long trends, which is really my new goal. But, I won't be adding to my losers to average in for a better price. I'll exit(stop out) on the trade and either reverse direction or just wait for a better entry.
Not included in the stats below is one trade which closed even.
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5 for 19 winners, a 26% success rate. Loss of $5.93 per share in 1.50 hours of trading.
