An Anatomy of a trade by LS Trader
A proper trend following system that is completely automated, like ours, turns all this on its head and takes the emotion out of trading. This is a key concept to keep in mind as if you enter a market on a uptrend, it is logical to remain in that trade until the trend is over. A mistake that novices (and even traders that should know better) regularly make is exiting too soon. There is always a temptation to take a profit, but doing so is the wrong thing to do until there is evidence that the trend is over. There is a major myth on Wall Street that you can never go broke taking a profit. This, in our opinion, is incorrect. The reason is that the markets only trend around 40% of the time: meaning that you can only expect to win on around 40% of trades. In order to be profitable then it is necessary to have your winners be larger than your losses. This can only be accomplished in 2 ways: one is cutting losses quickly and the other is letting profits run in order that small profitable trades have a chance to develop into larger profitable trades. If you think about it logically, it is impossible to ever take large profits if you always take small profits because small profits can never develop into large profits if they are taken too soon. This is a lesson that nearly all traders need to learn.
Crude Oil Chart
For our short trade example we are going to look at Crude Oil which is a trade that the LS Trader system gave a short entry for back on the 7th May on the July contract, entering at 9690. This was the level at which our proprietary rules had indicated that the trend had switched to down from up, following the break of key support at 9705. A glance at the chart will show that this break means that not only is the long-term trend down, but so is the short term trend. Add to this the break of key support and you have a very attractive trade proposition. When the short term and long term trends are aligned and a market breaks out from a consolidation, this gives the maximum chance of a trade developing into a decent trend. There are, of course, never any guarantees that this will happen and the trade could have reversed following the breakout to give a whipsaw loss, but this did not happen and the trend continued south, and is still heading south almost 6 weeks later.
Š Metastock
July 2012 | www.financial-spread-betting.com | 25