Trading What I See

Usually when I point out a setup, it’s a winner. If you’ve done any trading at all, you know how much easier it is to find the winning entries and exits after the market closes. And it’s easy to miss seeing the setups that fail. That’s why it is essential to either paper trade or trade small size (my preference) when trying new methods.

Today there was a nice Spring setup that failed. But let’s start at the beginning. There were two Measured Moves, first up and then down. A Measured Move is just an A-B-C pattern where the “C” leg is the same size as the “A” leg.

The pullback I have marked as a yellow “B” had a number of near misses as far as trendlines and channels are concerned, but the precise Measured Move was accompanied by a nice divergence for a pullback entry. When I have a cluster of levels that don’t quite match for a pivot I’ll often use the cross of the shorter moving average (13 ma) as my entry.

Then came the Spring. I see nothing wrong with it as a short setup. We broke above yesterday’s high and immediately reversed, and that top would have created a precise Measured Move A-B-C (in yellow.) There was even a small divergence in the Stochastic oscillator.

What do you do when a setup fails? If you trust the setup (and why else would you trade it?), you’re job is to forget the failure and re-evaluate the market. We still have a potentially large A-B-C, but with the divergence at the close it looks as though it may not hit the 162% Fibonacci extension.

But this pullback has just reached 38%, and a continuing move will normally have a large pullback (at yellow “B”) followed by a small pullback (the close.) I guess we’ll just have to wait for tomorrow and the next setup. After all, that’s what daytraders do.