Seeking The Uncommon Trade by L.A. Little
Are you looking for just another trade, or an uncommon one?
Thereís always another trade, the saying goes, and itís true. But should
you be looking for just another trade? It may be to your advantage to
go where others donít. Instead of looking for just another trade, itís
the uncommon one you should be seeking. The uncommon trade is
the diamond in the rough. Itís the trade with greater potential not only
from a reward-to-risk perspective, but from a probability of success.
That these trades are uncommon is what makes them so sought after,
but how can you find them?
Trades come in two flavors
One of the problems with trading and life
in general is that there is an abundance of
complexity. In this highly technical and
interconnected world where information is
instantly at your fingertips, it is best to just
tune out sometimes and step back in order to
see the big picture. In trading, there are just
two trade types: either you take a position
(long or short) when the instrument you are
trading is breaking out, or you do so when it
is retracing back to a prior breakout point.
It sounds simplistic and it was intended
that way, because in my opinion far too many
traders and commentators make it overly
complex. Here are a couple of simple charts
In Figure 1 you see an example of a bullish
breakout. In such a case, price pushes up to
a prior resistance area and then jumps above
it, breaking higher. A breakout trade implies
that the trader buys once a breakout occurs.
Although Figure 1 depicts a bullish breakout,
bearish breakouts are essentially the same pattern
ó in reverse. Whether prior resistance
is defined as a swing point, a resistance line,
or any other technical area, the point is that
price first reaches then exceeds the levels
where resistance resides.
Figure 2 is an example of a retracement,
which is preceded by a breakout; otherwise,
there would be nothing to retrace. A successful
retracement sees prices approach the
prior breakout area, hold, and then reverse
to head back the other way. Like breakouts,
retracements apply to both bullish and bearish
These two trade setups and variations make
up all trade setups. Every trade we have made
can be explained by these two basic trade
types. It is a useful simplification and, once
made, allows you to focus on the question at
hand: What makes one breakout or retracement
setup better than another?