Trading against a trend move is an addiction that just keeps taking.

 From all that I've seen in trading the one thing that nails even the best of traders is getting caught trading against a trend move.

The strong emotional desire to get a trade back to break even is usually the catalyst that drives destructive behavior.

Two things tend to occur, the trader holds a structurally deteriorating position as reality and belief in the traders mind diverge.

The other destructive behavior which tends to result in catastrophic loses is the adding of positions as price moves against the position.

This is an attempt to create a lower break even price.

At times the strategy works but creates the environment for the trader to suffer massive losses down the road.

We get wealth transfer as the chips are pushed away from the inexperienced to the experienced.

For these strong trends there has to be an unexpected move that catches out the majority.

Often on the SPI200 a strong down trend happens after the US markets have closed strongly.

Today is a great example as the SPI trended down not allowing longs to get a break even opportunity.

As the longs closed thier positions they where in effect selling, adding to the downside momentum.

SPI dumpday.jpg (96.78 kb)

With trading we need to be prepared for different scenarios that can occur balanced with the reality of the moment.

This is an interview with James (Jim) Chanos a very successful fund manager who specialises in finding shorting opportunities.

Two notable shorts were Enron and the latest financial crisis.

http://www.businessinsider.com/jim-chanos-china-is-overheating-and-overindulging-2010-2

Please remember that even though he may well be right with China, trading is about the here and now not forecasting the future.

It is more about being prepared so we can act if the technicals line up to take advantage of any new situation.

The streets are littered with traders who got the call right eventually but lost all their money before the event occurred.

An example could be Robert Pretcher Conquer the crash - YOU CAN SURVIVE THE DEFLATIONARY DEPRESSION written in 2002.

We could of missed some great bull runs and even worse lost by trading short at inappropriate times.

On a personal note I had a bit of an adventure in 2001 by moving away from technicals and listening to the talking heads on CNBC and other news services.

I had increased my account from around $40,000 to $120,000 within weeks. The NAB homeside problems and 911 disaster bolstered my account quickly.

Back then it was a bit of money and I was picturing millions just waiting for me around the corner.

I also had an ego so big that I struggled to fit through doorways bragging to my mates at the pub. They listened if it was my shout.

Although I had some luck in the events that occurred it was the chart setups that had put me in the right positions.

After 911, I became hooked on the news services trotting out expert after expert predicting what the future held - and it was all doom.

We had some anthrax attacks and the next suicide attack was around the corner.

So I watched the market bounce up and then loaded up some shorts.

The market bounced higher and I dropped $20,000 as I covered.

No problem, still up a hundred and just a bit early. Better flick the TV back on.

I loaded up a bigger amount on the next leg and guess what? Lost again.

I did this until I not only lost my profits but until I wiped my whole account.

I learned that a belief can be so strong that it can blind you from reality.

After, I looked at the charts with reality hitting me over the head like a baseball bat.

How could I have been so F***ing stupid?

I didn't have much choices with no capital left.

I remember sitting across from my wife going though my options.

1. Go back to the printing game. 2. Do some bar work.

#. Grovel to my wife for some capital to start again.

The last option worked and it was amazing the clarity I had when hitting the market from that point.

I added around $20,000 a month to my account for the next year although I think I lost my hair as well (so many traders seem to be bald)

Almost 10 years later and I still hit the markets most days. I still am fighting the trading demons but seem to be winning more battles than I lose.

I've mentioned in my blog in the past that I am always on the lookout for rejection bars.

These visual clues give you a heads up on a likely directional trade.

Multiple bars with tails can show where price movement has hit a road block.

This is the Dax chart of yesterday afternoon and the morning session today.

I highlighted the major areas but you can see a few minor areas that the tails held a move.

DAX tails.jpg (132.12 kb)

Here is a little play that I trade with good risk/reward parameters.

This trade is looking for a base to fail.

Often when the trade is successful there is substantial follow through.

On a failure of the pattern there is the possibility of a reversal trade.

I am looking for a base to form that is easily identified.

I then want to see price spike through support and quickly retrace back up.

In this example we can see a nice reversal bar with a tail.

This is where the range bars give great visual clues for trade setups.

Daxshoulder.jpg (107.39 kb)