April 2

How To Catch A Falling Knife And Profit More Than 65%Of The Time


My Typical Trade Walkthrough


Today I am going to share a very recent trade.  From this article you will see how I trade a strategy to make consistent profits from daily charts.  I will show you why and how I Enter the trade, where I place my Stop loss, and why and how I Exit the trade. 


What Type of Trader am I?


I design strategies to meet my objectives and beliefs.  My strategies consist of a set of rigid rules defining how I enter and exit trades.  Additional rules include where I place stop losses, position sizing (part of my money management) and how many trades I can have open simultaneously.

However it is down to my discretion as to whether or not I actually take the trade.   For example, If there is a very sharp drop in the general market, I may have lots of buys signals.  But I have learned to recognise market conditions that would not be favourable to my strategy.  Jumping in and buying this big unusual drop in the market could quite often be like trying to catch a falling knife.

Let’s get on to an example of a recent trade:


INCY Long 3/27/15


incy trade


This trade was taken using one if my most used strategies.  Essentially I am looking to buy quick dips in a strong uptrend and then take profit, selling into strength.

So here’s how the trade looked:

  1. INCY has been in a clear uptrend and even making new recent highs.
  2. 3/26/15 INCY become extremely oversold.  RSI on my chart is showing 5.3.  I set a limit order to enter the next day at 89.20
  3. 3/27/15 My order is filled and I’m in the trade.  There is a strong rally today and I also get my exit signal.  INCY closed at 94.36.  RSI on my chart is showing 78 and I want to sell and take profits into this rally.  I exit the trade at the open the next day at an even better price of 95.85

You’ll see my Stop loss level of 7903 place on the chart too.  This isn’t set at any significant level but a multiple of the Average True Range.  This multiple is kept at a constant across all trades taken using this strategy.

Note:  My Stop loss in this strategy is rarely hit.  But it’s used more importantly to allow position sizing.  A trade might go against me for a few days without hitting my stop, then rally and that will be my exit  signal.  I sell into strength.  This rally could still be below my entry price though resulting in a small loss.  But they are my rules, and I take the signals with no regrets.


So How Much Did I Make?


Although this is a typical trade, it is a quicker trade than average.  Trades using this strategy can commonly last up to a couple of weeks.

For those of you that are interested, I profited from a 7.45% move in INCY within those 2 days.  However this is NOT how I measure a trade’s performance.

I measure the trade’s performance as a fraction of the Risk (the distance between entry and stop loss).

This trade made 0.65R profit.

or the amount Risked per trade for each strategy always stays the same in relation to my account size.

For example, I may Risk 2% of my trading account size on each trade.  So in the case of INCY trade I profited 0.65R or 2%*0.65R = 1.3% gain to my account.


But My Gains are Smaller Than My Losses!?


Yes and no.

To have a consistently profitable strategy, you’re gains do not have to be bigger than your losses.

This strategy has a positive expectancy which means over a large enough amount of trades taken, it will make money. This is because:

  • High win rate.  In excess of 65%
  • Losses are not always the full amount risked or 1R.  Quite often much smaller.


To Conclude:


I hope this has given you an insight into how I trade one of my strategies.   However just because I can trade this successfully, doesn’t mean it would suit everyone.  Like I mentioned at the start of this article, This strategy is developed around my objectives and my beliefs.

You might notice that Entries into trades are when the price is moving in the wrong direction!  However I have learned to understand the price action and know that there is a high probability that prices will reverse and go in my direction.  But many traders wouldn’t be comfortable with this.

I should mention that in conjunction with this strategy, I also use a slightly different, but based on the same principles, Short selling version.  I like to have long and short positions open simultaneously.

Maybe next time I could show you a Short trade or perhaps show you a typical losing trade too.

If you have any questions or comments about how I trade then leave them below or email me at jarrod@thetransparenttrader.com




Featured image by Aurimas via Flickr.com


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