You got to know when to hold ’em, know when to fold ’em,
Know when to walk away, know when to run.
You never count your money when you’re sittin’ at the table,
There’ll be time enough for countin’ when the dealin’s done.
Lyrics from Kenny Rogers “The Gambler”
This means you do the right thing at the right time. It sounds easy but is not. The market moves so fast that stops get hit but take profits are too optimistic. As I said before scaling in and scaling out to improve average is key. I find buying a position at a predefined support is key. If it is going your way and breaks through resistance above then the decision is to take it or to add. If it is struggling at the next step (a high or low volume level or a pivot point support or resistance level), then taking some off helps – you can use always add later. Hopefully it goes your way and you have a runner. Worst case scenario you move your stop closer to break even and use some of what you scaled out to cover any loss.
Example from today: The market sold off at the opening bell on news. I was buying small as it was on the way down at the open gap from friday but the selling was extreme and I got taken out. My knife catching skills were tested. Not wanting to destroy my account I waited. It leveled off eventually so I bought at 1236 hoping for a 4 point gain at 1240 – it struggled at the bottom of my zone of interest to the upside so I took some off to take profit and to feel better. It was the right thing to do. There is nothing worse than a winner becoming a loser. I moved the stop for the remainder to break even with the original target in place which got hit and it again reversed.
The old 10 Deutsch Mark note has an image of Gauss and his famous distribution. This is the basis for Market Profile theory.
The 1st standard deviation is 68% of the Bell Curve distribution. The value areas are at the extremes. According to the Steidlmayer distribution the market is a series of smaller balances building to create a bigger balance.
This facilitates trade in a range until new information moves the market to a different level. He claims prices move slowly in the 1st Std Dev but extend quickly in the 2nd and 3rd. This would explain what happened with the S&P today (it sliced through the low volume run up area from yesterday and bounced at the top of balance from Tue/Wed last week). It seems it wanted to balance between Friday and Monday and will then decide where to go.
On a daily basis the Value Area High and Value Area Low are those areas in the 2nd and 3rd Std Dev’s. The reward in going long at the bottom of a bell curve is that you are buying below value. The risk is that the balance is complete and the market accelerates to the other end and further seeking new balance.
Often the right thing is difficult to do and the wrong thing is easier. Clearly the idea is to cut your losses short. Pulling the plug on a trade it before it hit your stop means you remain in control. Pulling the trigger to open and close a position requires an instant decision and overcoming any fear is vital. It helps if you set out thinking every trade is going to be a loser until the market tells you otherwise.
The goal with trading as Hopkins says is to achieve of, the mastery of the thing.