Avoid Chasing Trades Using This Technique

I want to focus on  the concept of rocket fuel, which is a term I use to talk about times when the markets are running out of steam right when you’re thinking of jumping into a trade.  However, this will also help put a couple of different pieces together and there will be a  multitude of different important lessons included here, based on some of the previous video and article concepts I have reviewed.

First of all, we can go back and see some of the things we’ve already learned in some of the previous videos, where we talk about the concepts of accumulation and distribution. So if you watch the video above you will see an example where,  we can see the distribution bar is coming 50% off the highs there. We can see accumulation bars where we’re coming 50% off the lows, then we’re coming back down and testing that area, only to go and push right back off that area. So we can see these concepts of accumulation and distribution in multiple places.

Now in addition to that, let’s talk about trading at the open. In my opinion, trading at the open is very risky, and that’s putting it lightly. There’s just no illustrating the risks that are associated with the U.S. open, and the London session open for that matter as well. There’s a lot of inflows and outflows at those times, and basically if you’re one or 10 or 15, 20 contracts, or a few hundred shares, maybe a thousand shares or so of something, you’re trying to hold down a whole market, so to speak. It’s just not realistic. So what happens is, during that time when a lot of money is sloshed around there very quickly, a lot of people tend to get themselves hurt.

Check out the video above for a classic example of how that happens on a chart. You see what ends up happening is as we went into this morning session in the example, things were  looking ripe for selling, kind of negative. On face value, we were dipping down. In this type of situation , I always gauge a lot of this off of the reactions of some of my newer students, what they’re thinking, where their head’s at, because I find that it is indicative of the average retail trader on the street. So, based on that, what ends up happening is, there’s a lot of people excited about the possibility of shorting the market.

Now, hopefully, some of you are already seeing some of the potential issues with doing this. Number one, being right there at the U.S. open, if we’ve been dipping down dramatically into the U.S. open, the likelihood of it continuing to sell off is fairly slim. Frankly, it’s –extraordinarily slim. We see these situations where the news ends up being very bearish. The market’s selling off into the open. Next thing you know, the market has this big rally, only to leave you hanging with a short position, and you’re thinking “What? The news was bad, the market was moving down, what happened?” And then all of a sudden an hour or two later, the news media is like “Oh, because of this or because of that.”

So here are a couple things to keep in mind:

  1. Trading rate near the U.S. open, very dangerous. I usually avoid trading plus or minus 15 minutes, around that time.
  2. Another thing to keep in mind is what’s going on with the bigger trends? That’s where the multi-timeframe analysis really factors in. Sometimes,  when the 2-minute looked like the market was going to heck in a hand basket; the 5-minute chart looked like the market was going to heck in a hand basket; the 15-minute chart didn’t look good in itself, but if you looked at my rising long-term support levels, you’ll notice on the 15-minute chart, at just that point where it looked its worst, we were actually smacking into rising support there. Additionally, you look at the hourly chart here, and we were actually looking very bullish with what I refer to as railroad tracking underneath with long-term support levels.

So, I often tell traders, be careful not to get that myopic focus on that 2-minute and 5-minute chart in exclusively. You really need to look at the bigger picture as what’s going on. Even though you may be a day trader or a short-term trader there, the 15-minute and the 60-minute can still be a heck of a guidepost for you.

Now, when we talk about the concept of rocket fuel, what happens is often, traders don’t sit there think…“Well gosh, I want to buy this area here.” No. Remember, most traders, especially newer retail traders, were actually looking at shorting into an area that is pushing down. So what happens is, now as the market starts to spike up. Those that are in a short position are realizing how wrong they are, and then this long wide-range bar spooks them out of the trade all together and they take a loss.

Those that weren’t in a trade start thinking “Ah-ha, the real move is to the upside; I need to jump on this thing long.” Well, the problem is, after moving 40 ticks like in the  example in the video above able this concept, where we moved almost 40 ticks on the Russell in about 15 minutes, that’s a pretty healthy move in itself, even though it was bouncing off of longer-term support. It is a pretty healthy move in the current market environment that we’re operating under, So, when the market moves 10, 12 ticks in a certain direction, people are trying to jump on a trade only to have it whip right back against them. So, again 40 ticks is a pretty healthy move.

Well, to add insult to injury, now let’s take the concept I also taught you with support and resistance here in just the last several videos and blog articles. Remember what you do: you take areas where you have lots of opens, highs, lows, closes, right? So you see back over here in this area over here, we had lots of these closes, opens and closes, opens. Same thing here, closes, opens, lows right here, open to this bar. Lots of that taking place on these 15-minute bars. Over the course of hours, this point right here showed itself to be a key resistance band. So what happens is, a lot of retail traders see this big long wide-range bar, and this ends up being a calling card for them that this is going to go much higher. What they’re not looking at – because then they start saying “Wait a minute, the trend is up, the hourly’s are up, that’s great. We’ve gone and pushed through.” Not giving deference to what’s been happening where we’ve been congesting for the last several hours.

Remember what I said here: this whole area from this band to this band was resistance right through here. So right where you saw that area, that’s all basically one big resistance. So as this was pushing down and was rallying back up, it was rallying right back into that resistance, and you can see it right there, the bottom end of that. So you see how we’re putting together multiple concepts that I’ve shared with you in these different videos and blog articles.

At this point where a lot of people are finally saying “Hey, you know what? Maybe I want to go long on this,” maybe you should take a second breath and say “Wait a minute. It’s already just pushed 40 ticks in 15 minutes right up into a resistance band on both the 15-minute chart I’m looking at trading and the hourly chart band of resistance right up above through those previous areas of accumulation and distribution Rob shared with me. Maybe I don’t want to take that trade after all.”

We’ve talked many times about the average stop-outs and things like the Russell and the SNP. On the SNP it’s usually 6 to 12 ticks is the average stop for most retail traders; it’s usually 12 to 20 ticks for most Russell traders. Well sure enough, you can see, this thing got right up to that key level we’ve mentioned hundreds of times over the last several years. Gets right up there to 1223, comes right back down to the 1221 and just slightly below it. So it made sure it got all those retail 12 to 20 tick traders right out of there.

So, I want to make sure that you understand a couple of different things and how they work together. The concept of rocket fuel, how far, how fast have you gone? And then basically is your rocket running out of fuel right at that key time where it’s hitting in the major atmosphere and needs to blast into outer space, and yet you’re sitting there with all this resistance right there to your rocket? And yet you’ve just used up all your fuel to get from here up to here.

That’s the key thing that I want to impress upon you, this idea of how dangerous it can be to chase an instrument. That’s really what we’re talking about here, gang. We’re talking about chasing an instrument. Many of us have done that. It’s something that we tend to do a lot more as we’re newer in this business and we’re working on becoming a professional. So the sooner you’re aware that you’re chasing into these instruments, the better.

Now, when you combine this with – taking that concept of the rocket fuel along with the areas of accumulation and distribution that I mentioned to you earlier, and how to identify key support and resistance levels in the past videos and blog articles, now you can really start putting the pieces together of the much higher probability areas where things are likely to fizzle out. Rather than sitting at that point of where you’re historically thinking “I want to jump into this long,” you’re thinking  “Uh-uh. No thanks. I don’t want to be anywhere near this, certainly not long at least.”

That’s the key, putting a couple pieces together, not shorting into the rising higher timeframe resistance, using areas of lots of opens, highs, lows, closes, as resistance bands, and using the accumulation and distribution techniques and putting it all together to help avoid those chasing moments that most of us experience early on in our trading career.

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