4 new bullish signs about this market
The market had a very constructive
day Wednesday. The QQQQ broke the downtrending
channel that I showed in my chart and is looking to re-establish its leadership.
The Semis rose nearly 3% and may be starting to get in gear. The S&P and the Dow
are now solidly above their 50 and 200 day moving averages. Volume came in
strong. Things are starting to look better. There were a few negatives in
today’s action, though. The first problem was the continued selloff in bonds.
The second issue is the fact that the VIX is already becoming stretched to the
downside. This could limit market upside or lead to a pullback in the near term.
The price and volume action take precedent over these other concerns, though.
For the time being, I’m going to give this rally the benefit of the doubt.
Hopefully, the next pullback or consolidation will be brief and on light volume.
That would really make me a believer.
Today I would like to touch briefly on some of the difficulties some traders
face when incorporating new mechanical strategies into their trading. When
traders discover a new strategy, they have a tendency to want to trade it
aggressively right from the start. They also have a tendency to want to change
the rules after they get into a trade. This desire to change the rules on the
fly is normally dangerous. Traders must fight this temptation.
If you are incorporating a new strategy, whether it was developed by you or
purchased from someone else, that strategy should already have exit rules built
into it. Those exit rules will be part of that strategy for a reason. In most
cases that exit rule will have been tested against a litany of others before
being deemed the most suitable by the designer.
Still, trading a strategy with real money is much different that simply looking
at some backtested results. Because of your involvement in the trades, you will
certainly have ideas on how the strategy may be improved. Do additional testing
yourself before changing the rules. Just because you believe things are
different this time doesn’t mean the trade should be cut short.
The easiest way to incorporate a new strategy while you refine it into something
you are completely comfortable trading is to begin with a much reduced position
size. The ideal size to trade is large enough that you’ll have an interest in
the outcome of the trade, but small enough that a bad loss won’t really affect
you. That will help simulate ideas while keeping you in your emotional “comfort
zoneâ€. Once you are able to gain more confidence (and profits) you can begin to
ratchet up the size to one that you feel is more appropriate for the strategy.
Best of luck with your trading,
Rob Hanna
RobHanna@comcast.net
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