Trading What You Think Can Cost You

I was talking with a trader a few days back which included an exchange of charts. That’s not something I usually do but considering this person is a “friend”, I made an exception.

The trade was based on a confluence of major turning points and a few other factors. Thinking this was a probable place of trading decisions, I was looking out for a move. What the move would be though, I did not know but taking range out of the equation:

  • Price would bounce
  • Price would break the zone

The exciting thing for me was this “grasshopper” trader was watching the same zone so I knew they’ve picked up something during our talks.

The difference though was he took a loss on the trade and I took a win.

This chart shows what the zone we were looking at for a trading decision.

Trading Decision Zone

1. Saw price break down from and also had other variables not included on this chart
2. Price rallies back up into the zone for a trading opportunity

My friend shorted in the zone and was quickly taken out of the trade. His reasoning was sound…until it wasn’t.

He saw smaller candles forming which indicate a loss of momentum. When the larger candles showed up, he reasoned it was suckering in longs to take them out once price reached the zone.

Wouldn’t be the first time that happened, right?

My reasoning for not shorting but playing a bounce long was also sound.

1. High profile trading zone would have interest for other traders
2. I didn’t presume to know what the larger candles were doing…except buying…a lot
3. Waited for market to show its hand

The playing field changed as soon as the small candles were erased by the thrusting price action. For me, when price is rallying with strength into a zone of interest, it raises a red flag. Knowing there would be orders at the top end break of the zone, if I moved the market, I would use this strength to take them out.

…and that’s what happened.

Still no trade for me yet.

I watched price drill the zone and then waited to see the retest.

The retest was muted in strength compared to the breakout of the move. I anticipated a bounce because of that and the bottoming tail into the zone was the entry area.

Here’s the kicker….I was open to a failed break out short but that all depended on the break out itself including how price retraced back to the zone.

Retrace with strength = No long play
Retrace with weakness = Long play

The difference between two traders was I was tuned into a changing game without a preconceived idea as to WHY. While I didn’t know the reason for the buying, I did know that zones, especially higher time frame zones, have price interest on both sides of the coin. The momentum to the upside was simply a red flag that buyers may be gunning for what lies around that zone. That forces a wait and see sitting on the hands attitude.

As you can see, bears did not have a chance when the train started rolling.

Lesson…..trade what you see…not what you think.

Trade well.

For more updates from Mark and the team at NetPicks, be sure to visit their trading tips blog at NetPicks.com.