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Jim
Wyckoff Discusses A Favorite Trading "Set-Up"
By
Jim Wyckoff
(Note:
This is the first installment in a regular weekly series of
educational articles on trading techniques and how to be more
successful in the very challenging business of trading the futures
markets.)
I
had a fellow email me recently, asking: "Without giving away
any precious secrets, could you tell me a way to improve my entries
and exits (on trades)? It seems nobody wants to share their
system."
Well,
first of all, I don't have any trading "secrets." What I
do have is many years of market experience, including studying the
markets and technical analysis--and listening carefully to the best
and brightest traders share their philosophies on successful
trading. (You should be suspicious if anyone tries to tell you they
do have a "secret" to trading success, but that's another
story.)
On
better entering and exiting trades, first of all you need a trading
plan--before you enter the trade--and you need to stick to it. Your
trading plan can have different scenarios and options once you're
into the trade, but the key here is don't "fly by the seat of
your pants" when you're into a trade. You don't want to let
emotions dictate your strategies while you're actively trading a
market.
Know
how much money you can stand to lose and then place a stop
accordingly, and then don't change your mind when you're in the
middle of the trade.
If
you've got a winner going, you should also have a plan in place
regarding when to take your profits. Again, your trading plan can
allow for some flexibility once you are in the trade.
More
specifically, I like to "buy into strength" and "sell
into weakness." This trading method abides by the old trading
adage, "The trend is your friend." Conversely, traders who
try to "fight the tape" and be a bottom-picker or
top-picker usually wind up getting their fingers burned.
One
of my favorite trading "set-ups" is when prices have been
in a trading range--between key support and resistance levels--for
an extended period of time (the longer, the better). Then if the
price "breaks out" of the range (above the key resistance
or below the key support), I like to enter the market--long on an
upside breakout or short on a downside breakout. A safer method
would be to make sure there is follow-through strength or weakness
the next trading session--in order to avoid a false breakout. The
trade-off there is that you could be missing out on some of the
price move by waiting an extra trading session.
If
you are long the market, set your sell stop just below a technical
support level that's within your tolerance for a drawdown. If you're
short, set your buy stop just above a technical resistance level
that's within your tolerance for a drawdown. Don't set your stops
right at support or resistance levels, because there's a decent
chance that those levels will check and possibly reverse the price
move--and you'll miss getting stopped out.
If
you've got a winner and decide to let your profits run (per your
initial trading plan), use trailing stops that utilize technical
support and resistance levels.
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