Did you ever read something in a book and it seemed to make sense when you read it, but you didn’t truly understand the lesson until you lived it? Sometimes it happens in reverse where you lived the lesson first and later find it in a book. With a shrug of confidence you say under your breath “Been There”, “Done That”.

I wanted to share with you a lesson that I learned trading the 30 Year Bonds early in my career about price action only to later read about it. Often times I laugh and joke about this lesson with my colleagues as we call we call it “Flipping the Bird” but officially it is called a “Head and Shoulders” pattern. Reliving the moment during my first experience I remember the pit noise roared to life as everybody starting bidding or trying to buy turning prices sharply higher. I happened to already be long (bought) the market. Man, What a rush!! Up $200, Up $500, Up $1000 all in the matter of moments. I started to feel the greed consume me. Up $1500 and still letting it ride…Awesome!! and then all of a sudden some news hit and all the bids dried up and the whole pit now started selling the prices down. At first I was saying under my breath, What’s wrong with you guys?!! Up $1000 and didn’t believe the new direction..First mistake…. Up only $500 and now I tried to sell with the sellers….Second mistake….Break Even $0….I said to myself, the market owes me $1500….Third mistake…Final tally, I puked down $1000 as prices continued to nose dive.

The funny part is this all happened within a 2 minute stretch. The feeling I had in my gut was the market just #%^@’d me or as we now laughingly call the “Head and Shoulders” pattern “Flipping the Bird”. The real lesson learned in fast market conditions was that when you decide to get out, don’t join the crowd and try selling where everybody else is selling (equivalent to a resting sell limit order) as there isn’t time to hesitate. Sell a price where somebody wants to buy it (equivalent to a sell market order) even if it is one you don’t like. Get in front of the crowd to exit the position!!

Head and Shoulder chart patterns generally signify a reversal and help confirm the shift when it appears in uptrends or downtrends as the example shows. Draw your trend line from the beginning neckline to the ending neckline. As prices break this key neckline a move to test the extremes of the starting point of this pattern and beyond is likely.

I don’t want anyone to lose money, but when the “Flipping the Bird” pattern develops, it will teach you so much about price behavior. Think of this pattern as a hand and, to me, it looks like the market is giving you the “finger”. You will begin to understand when you get involved in the direction of the break-out in the head portion, that you initially feel like a champ and retirement is around the corner. If you discover a sharp reversal in direction, a substantial loss could occur if you hold on hesitating in disbelief.

Remember the next time when prices shift violently in the opposite direction, don’t hesitate to act and realize the new direction in price is likely to take over and control the action for some time to come.

You can’t win, if you don’t play!! Prosperity is at your fingertips! All you have to do is grab it!!

For more RDS articles on trading, visit www.rdstrader.com.