For anyone here (and on other threads) who claims otherwise, nobody knows in advance what the market's going to do and when it's going to reverse direction.
Very early this month in pre-market the ES fell off a cliff on very bearish disappointing news and I'm sure MANY traders thought, "This is really bearish news. This is the big correction we've been expecting" and were shorting and adding to their short positions all the way down to the 1012 zone where it found rapid support in an established long term uptrend and moved on to break "DOW 10000". I'm sure there were traders who shorted 1013, expecting a push into the 900's before finding support.
What has cost me the most as a trader in both profits cut short and in losses is market bias.
Market bias: "Price has gone too high, it has to come down." "Price has gone too low, it has to go back up." "Earnings were bad, this stock is gonna tank." "The economy is a mess, this market can't keep going up." Etc.
What's worked like an ATM machine is positive expectancy based on technical price action zones: "We've reversed and left a higher low, go long now." "We're in a downtrend, sell the next rally to the 20 EMA with a stop at 55% retracement to the previous resistance level." "We're about to test the high in a strong uptrend, place a buy stop just above the high for the breakout." Etc.
Some people say you have to have bias to make a decision which direction to put on a trade, but I've learned from a few mentors on ET that you absolutely do not. (This doesn't mean I've yet shaken my bias; it's still a huge struggle for me to get over and as a result I often cut my winners too quickly.)
What's crucial is to trade the price action and use technical zones (S/R and overbought/oversold) as a GUIDE to positive expectancy. News may be very bearish, but if the big money sees a support level at the trend line in an established uptrend it will continue to accumulate to the long side and the stock (or market) will go up, because the trend is your friend until it ends and picking tops/bottoms should only be done technically and with extremely tight inviolable stops.
Fading tops/bottoms requires averaging into losers (except in those rare cases when you get very lucky and catch the true pivot high/low). Although this strategy can produce losses (as can any strategy), it can also produce very nice gains.
Neke, I believe you get into trouble on trades where you have a strong bias going in and when it inexplicably moves against you, you continue to fade the move by averaging in until the pain is too much. This is the result of lack of planning.
My suggestion is to KNOW IN ADVANCE how much you're willing to lose on the trade, divide your full position into 3 or 4 parts to average in with, and exit at the predetermined max loss. If you find yourself having the thought "This HAS to turn around", that's a sign you're trading on bias and emotion instead of a trading plan (
http://www.elitetrader.com/vb/printthread.php?threadid=114977).
Planning a trade means you've accepted a potential loss of $X on the trade and by accepting that in advance as the price of admission to the trade, you won't get emotional over it if it runs against you.
Seriously, are you willing to lose $40K or $50K on a single trade? Probably not unless your AVERAGE winner is $60K or better.
