AHH... THAT FEELING

The topic for today is staying out of trouble. I am not sure which is a more extreme feeling between the angst when a big move happens and you miss it, or the pure joy of knowing you saved your ass with a proper judgement call. Such is the life of a trader in that we continually experience both of these extremes. I guess I must like extremes because I go through these same emotional swings in my quest to rescue and save animals. We just lost one yesterday which is incredibly painful, yet I balance that with the joy of the new one we just rescued. Back to trading.

The above chart is the SUGAR market and it shows if you zoom in to where the arrows are, where I went short then quickly exited for a small profit in a trade that I just flat out was dead wrong in. On the surface this does not seem like much of an example for a trading blog from someone who is supposed to know what he is doing, so let me go through the logic of what happened here. As a discretionary trader, I am constantly challenged to read my indicators properly, no small feat in today's climate. I am looking in general for trend changes in commodity markets across the board this month, and when I came across this chart the other day, I thought I had a sell signal, and I took it. I had reasoned that the momentum indicator had changed to a down trend, and price had reacted up a few bars. As a result, I sold below the low of Wednesday on Thursday. The market went down, I actually waited for it to bounce after it traded through the low to get a better entry price. It then closed below my short entry, so far so good? Not so fast.

When I looked at this more closely, I noticed that in spite of the corrective down move off the highs in this market, that the POIV accumulation/distribution indicator from Larry Williams, had remained almost right at the levels of the price highs. This was a major red flag and it was something I missed on my initial analysis. Once I had that under my belt I began looking to see if there was anything else that might support a long versus a short. If you look at the indicator you can see where I indicated with this how it had gone down much farther than the price had. This is always a potential exhaustion situation. When I considered this with the monster up trend that is still there, it seemed to be that the higher probability play here was actually to go long if it started rising again. I next paired that with the knowledge that based on POIV there was accumulation going on here.

At this point I was dead convinced that this was a buy setup not a sell setup, so I just exited my short at the opening going flat. It so happened the opening was about 20 ticks below where I shorted this, so it wound up technically a small gain. That portion does not matter at all. The point was I got out of a very bad trade without taking a loss. The absolutely love the feeling of seeing a good decision like this play out. I am not going long here yet because the ranges are so big here that there is certainly the possibility this will become a congestion period. I will wait for things to settle down here then look again.

What I did here is a slippery slope. You do not want to make a habit of entering trades then exiting them on a whim. This was far from a whim. This was sound trading logic and evaluation. The whole point of having stops is to protect bad decisions. However, if you happen to realize that your entry was just completely wrong due to an error on your part like what I have just described, you should get out immediately. You can always get back in. Technically this trade would not have been stopped out yet, since the stop was above the high of Wednesday, but it is a trade I did not want to be in for the reasons I just detailed, so I am out. I also used this same logic in the Russell ETF trade I put on the other day. It became clear to me there especially watching the other two indexes make new highs even though this one was lagging, that I did not want to be short there. I exited that one as well, in that case for a small loss.

In summary, if you find you have made an error you should exit immediately. You need to be careful second guessing trades. You have to be able to understand when you are second guessing and when you have found an error in your assessment of the trade. This is what is called being a trader. We have to balance all sorts of things and make good decisions. We then have to move on to the next one.