Stocks & Commodities V. 31:2 (58-60): Seeking The Uncommon Trade by L.A. Little

Stocks & Commodities V. 31:2 (58-60): Seeking The Uncommon Trade by L.A. Little
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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 for visualization.

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 setups.

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?

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