If It Walks Like a Duck

Whenever I enter a position, after setting a protective stop loss I begin looking for my first exit level. My compromise between getting out too early and holding a position too long is to trade multiple contracts.

Sometimes finding a logical point to take some profits can be difficult. I don’t automatically exit at Fib or support/resistance levels, but use them as areas to watch price closely for reversal indications. And sometimes I’ll use points that others may not consider “correct.”

After a nice Spring setup just after the open (complete with a Stochastic divergence), price re-visited a resistance area created yesterday, making a third reversal at exactly the same level. Although there is only a single bottom pivot, I’ll probably start to treat this area as a potential rectangle.

A “correct” rectangle will have at least two pivots at both top and bottom, but notice what happens when the bottom support breaks. There is an immediate pullback to that support, just as often happens with a “real” rectangle. If you’re willing to trade “almost” patterns, that pullback was a nice entry for a short sale.

For those not familiar with the quote used as today’s title, here is a more complete version:

If it walks like a duck and quacks like a duck, you can be reasonably sure it is a duck.

For my trading the same thing applies to rectangles, triangles, and many other patterns. If it acts like a rectangle, I’ll certainly mark off a rectangle measurement for a target even though it doesn’t meet all the normal requirements.

And that rectangle target is where we got a nice reversal today. We eventually moved somewhat lower, but first targets don’t necessarily mean the end of a move. But they are certainly good places to take partial profits.

One of the most difficult things about discretionary trading is deciding how much leeway to give patterns and levels. If you are just starting out, my suggestion is to require very strict adherence to the “rules”, but after you have analyzed thousands of charts you’ll begin to see more “almost” patterns and discover that they often work.