New Trader,Rich Trader 2: Good Trades, Bad Trades pdfdrive com

Chart courtesy of StockCharts.com
In a break out over resistance sellers will no longer sell for less than
resistance and buyers have to pay more than resistance to get in.
Chart courtesy of StockCharts.com

---

“A trend is best entered at the point where something quantifiably changes in
price action, like new highs or new lows in a trader’s timeframe. All-time highs
and all-time lows is a favorite break out strategy for many trend traders. Really,
all traders, regardless of their method, are trying to profit by understanding and
betting on a trend,” Rich Trader said, continuing his impromptu lecture.
Buying all-time highs is trying to capture a breakout trend.
Selling short all-time lows is trying to capture a break down trend.
Buying a strong reversal off the bottom is an attempt to capture a rally back
to resistance.
Selling short a breakdown at resistance levels is trying to profit from a
retracement to support.
A trader who shorts over extended markets in either direction is trying to
capture a trend where the market reverts back to its mean.
Out-of-the-money option buyers are betting on a strong trend to their strike
price.
Option premium sellers are betting that the trend is already priced into the
option they are selling and that it will not go farther than that.
Day traders are trying to profitably capture daily trends.
Intermediate term traders are after profitable trends on the daily chart.
Long-term trend followers are looking for the big trends on weekly charts.
“Almost all traders are trend traders, whether they know it or not. The trader
has to focus on quantifying how they will identify and capture trends in a
profitable way on their timeframe,” Rich Trader said as he turned to look at New
Trader. “The entry should be at a high probability moment after confirmation
that something has changed in the price action which may indicate a move in one
direction. The entry level should have a good potential risk/reward where the
trader is exposing 1% of trading capital at risk for the potential of making a 3%
profit on total trading capital.”
“So I really need to be focusing on price action to identify potential trends –
not opinions, beliefs, or listening to others.” “The success of your trading
method will be determined by your ability to identify, enter, and exit trends.”
“How do you best identify where an exit door is?”
“You’ll want to be in the trend for as long as possible. You need the big wins
to pay for your small losses. You look for warning signs in your trend trades that
tell you the trend may be nearing its end. In fact…” Rich Trader continued,

---

pulling out a piece of paper. “Here are the warning signs I look for as I trade
trends off the daily chart.”
If an uptrend suddenly takes out a previous day’s lows for the first time in
many days, that could be a good place to take profits or be cautious.
If a downtrend suddenly takes out a previous day’s highs for the first time
in many days, that could be a good place to take profits or be cautious.
If the price violates a key short-term moving average that I am using and
then price is going to close on the other side of that line for the first time
since entry, I will exit there.
An expansion in volatility and the average daily range will make me
cautious if I am on the long side or make me lower position sizing if I am
short.
The loss of a support or resistance level for a recent gap in the chart is one
exit signal.
A huge gap and reversal against the direction of my trend trade would make
me believe it is ending and I would exit.
“The key is that you must quantify what will make you enter and exit based
on principles and chart study, not personal opinion; once you have that method
planned out, follow it and adjust as you learn and grow as a trader.”
New Trader nodded, looking over the list studiously. “Yes… thank you for
this.”
Rich Trader just smiled. “Of course. How are you and Jane getting along?
New Trader flushed. “I don’t know what you mean. I haven’t seen her in
days.”
“Well, perhaps you should do something about that…”
New Trader scowled.
“I don’t know why you keep trying to set us up…”
Rich Trader looked at him with sad, knowing eyes. “You seem lonely.”
And there was nothing New Trader could say to refute that.

---