Last week I posted a blog outlining possible buy set ups in the ASX 200 index and two major banks. Although the setups weren't triggered, the markets were slammed in the opposite direction that day making the timing of the post a bit unfortunate to say the least. Now a similar set up has emerged in the Australia 200. This raises some interesting questions about how traders should treat a situation where your original idea didn't trigger
Different people will have different rules but when it comes to actual trades, I have a one shot only rule.
If a trade is entered and then stopped out for a loss, my rule is not to look for second or third opportunities to re-enter involving the same market situation ( i.e same directional trade and same instrument around the same price zone). This means I have to deal with an aspect of trader psychology. I need to be prepared to deal with the fear of missing out. With this rule, there will inevitably be times when the market goes onto to do pretty much what I thought it would. Only it does it after I've been stopped out. You just need to be philosophical about this and move on. Chances are you won't even remember the individual trade after a while.
For me, the benefit of the one shot only rule is a risk management one. I avoid the risk of falling in love with an idea and effectively risking double or triple the loss set out in my risk management plan by having two or three failed trades based on the same situation. The market provides plenty of opportunities. Better to move on to something else and take a clear look at new setups
However, in a situation like last week where the trade set up simply doesn't trigger I apply the opposite rule. If price hangs around the same price zone and still fits the rules of potential setups, I leave it on the watch list. Here the psychological risk is that the setup failure up makes me unnecessarily fearful of the situation. There is no risk management implication. I haven't yet entered a trade; so no reason not just to go with the flow of the market and use the setup rules if they still apply.
I discussed a typical entry strategy to wait for confirmation of a trend change, for example waiting for price to close above the previous day's high. This didn't happen. As it turned out the banks ended up being smashed for the rest of that day. There was no trend change. That day's market action actually went on to form a bearish engulfing candle, closing on the lows and well below the previous day.
The index was not dealt with so harshly. The retracement set up didn't trigger but the index held around that price zone. Ironically this was not due to the banks but to other sectors including materials holding up pretty well.
In last week's post, I also discussed how the ASX 200 and Australia 200 charts can sometimes compliment each other. The levels are sometimes different because the Australia 200 trades overnight, not just when the stock market is open
So, also ironically, it's the Australia 200 chart, not the ASX 200 I looked at last week that's giving the clearest indication of a potential buy trigger today
As the daily chart below shows, Australia 200 is looking as though it's rejecting the 61.8% Fibonacci retracement. If a trend low is confirmed here, it will be well above the lower Bollinger Band (blue line) while the last trend low was well below it. This indicates much weaker downward momentum and reinforces the potential for a good bounce off this retracement level.
So here we have a second set up around the same level as the one that failed to trigger last week. A conservative approach to entry would be to wait for reasonable certainty that tomorrow morning's close will be above yesterday's high.