Another week in the books and another week that I’m reminded of Jesse Livermore’s famous quote “It was never my thinking… it was always my sitting and waiting.” I don’t think Jesse keeping his eyes closed or burying his head in the sand. I think he was talking about adhering to his plan, his trading rules, and allowing it to play itself out.
This week saw some more wild swings in the stocks we’re trading. Headlines are talking more about ‘market froth’. When we buy into those narratives, or any narrative for that matter, we’re taking our eyes off the market and what is actually happening. It becomes easy then for emotions like fear to begin mascerading as conservative wisdom, causing us to aggressively roll up stops and then see trades continue higher without us.
Rules are set, strategies are made, and risk is managed BEFORE trades are placed. A big part of trading well is allowing the plans we’ve set to play themselves out.
This week, we have a market that is up and the monthly time frames, up on the weekly time frames, and sideways on the daily time frames. There are nearby levels of support on the daily time frames (see charts below).
The number of stocks making new highs vs new lows remains robust. New highs continued to hit triple digits and new lows remain virtually non-existant. I’m seeing this as a sign of continued breadth and participation in the rally.
We’re also seeing stocks continue to make fresh setups. We had about 40 ideas out of the 300 stocks (yes, the universe list increased substantially this week) setting up. That’s substantial. We also have 11 of them making it onto the focus list. With so many good looking setups, opportunities are plentiful.
All that said, we always need to be prepared for the opposite side of the trade. This is where setting aggressive stops can get you kicked out of trades prematurely. I always prefer stops to be set below price structure that lines up on both daily and weekly charts. Running ideas through the Trade Gauntlet helps make sure that the ideas are robust.
We also want to be mindful of ‘portfolio heat’, the total amount of risk we’re exposed to. Think about what would happen if you were stopped out of every position you have. How much of a drawdown would that be? Are you comfortable with that number? Sure if that happens it wouldn’t be nice but are you comfortable if it happens once in a year (about a 2% chance annually)? Think about it. It’s unlikely but its a card in the deck and we need to prepare for it. The more prepared you are, the less fear you’ll have and will be able to sit and follow your plans.
Checkout the charts of the indexes below for a closer look at the action.
MONTHLY CHARTS (indexes) Overcall Direction = Up: https://www.tradingview.com/x/02vproF0/?aff_id=15325&offer_id=10
WEEKLY CHARTS (indexes) Overcall Direction = Up: https://www.tradingview.com/x/xL0CAM5v/?aff_id=15325&offer_id=10
DAILY CHARTS (indexes) Overcall Direction = Sideways: https://www.tradingview.com/x/NAxysfLR/?aff_id=15325&offer_id=10
(on the lower right is the image of stocks hitting new highs vs new lows on the NASDAQ & NYSE)
Deep Dive Video