How to Deal with Retests of the Low?

[Arindam]

Once again, this post is just me thinking aloud, and it is not meant as investing/trading advice to anyone else.

Consider the following chart where a 1-month low has been flagged. (The ticker doesn’t matter, and it could have been any of dozens of others.)

By now, evryone knows what to do with such a signal. So let’s advance the chart by one day to see how things unfold.

Surprise, surprise. Rather than the expected ‘red’ Smiley Face, the flag is ‘green’. But the inferrable signal is the same, “Buy at tomorrow’s open.” So, let’s write the order and see how things play out by advancing the chart another day.

Opps. We got clobbered and ended the day down on the position. So, what happend? Note the candle from two days previously. The move down was greater than the average for the month, but it was done on no more than average volume, suggesting not much conviction. So, possibly, a reversal could be expected, which happpened the following day , and that reversal was reversed on the day after that in a retest of the prior low.

Said another way, what appears to be a breakout often fails once or twice or three times until buyers do overcome sellers and move prices higher. Stan Weinstein talks about this in his book and suggests that them who consider themselves ‘investors’ should always expect a retest of the low, and that they shoul wait for it to happen before putting on their position. Those that consider themseves ‘traders’ could act on what appears to be a breakout, but they should put on only half their position.

So, let’s advance the chart another day.

That’s a pretty weak signal. But let’s take a chance on it and buy at the open.

Bingo! In at 17.12 and closed the day at 17.51.

Charlie

[Arindam]

Let’s consider another example.

Per Quill’s rules --as I understand them-- a valid ‘Buy’ signaled has flashed. But notice what happens next. Opening a position at the open would have resulted ina loss for the day.

But now notice what happens the following day.

That’s a move one would have liked to have caught, and it could have been done with a buy-stop order set at the low.

[Quillnpenn]

Charlie,

Appearss you to took a pounding on the Sell side or you were late, but executed the buy signal according the rulez

Good job at the Bingo . Can you move the xovers at the top one day to the left on the 4th chart up.

Guessing you like to buy plus two (2) bars out of the gate to feel safe in making an informed decision.

Quill -

[Arindam]

Quill,

Lots of times --probably most of the time-- I don’t follow “the rules”. I trade “off-the-cuff”, doing what seems to make sense at the moment. That’s OK if small money is involved. But I’m thinking to increase position size in 2024, and I want to run a more disciplined campaign. Hence, I need a set of rules that I really can stick to without the need for much intervention.

There’s a trader’s proverb that goes like this: “Do you want to be “right”, or do you want to make money?”

Generally speaking, if I put on five positions, I lose on two, scratch on one, and make enough money on the remaining two to turn a net profit. I truly doubt that I can increase my right/wrong ratio. I.e., I can become more aggressive about cutting the amount of losses though not their frequency. The latter is just baked into what trend-following systems can produce, on average and over the long haul.

You said, “Guessing you like to buy plus two (2) bars out of the gate to feel safe in making an informed decision.” Actually, the opposite is true. I hate being late to a trade. If it seems I am, I’ll back away. But getting in early and then getting clobbered in the retest of the low isn’t fun. But the pain can be mitigated with position-sizing.

Charlie